ESTATE OF SALLY J. ANENBERG, DONOR, DECEASED, STEVEN B. ANENBERG, EXECUTOR AND SPECIAL ADMINISTRATOR v. COMMISSIONER OF INTERNAL REVENUE
Docket No. 856-21
United States Tax Court
May 20, 2024
162 T.C. No. 9
TORO, Judge
In March 2012, with the consent of D‘s children and S, a state court terminated the marital trusts, and all of the underlying property held by those trusts was distributed to S. After S made an intervening gift of a portion of the C shares to D‘s children in August 2012, S sold the remaining C shares from the marital trusts to D‘s children and grandchildren in September 2012 for interest-bearing promissory notes for the purchase price of the C shares. S filed a gift tax return for 2012 and, in relevant part, reported gift tax only for the August 2012 gift of C shares to D‘s children. Sometime later, S passed away.
Served 05/20/24
E filed a Motion for Partial Summary Judgment maintaining that (1) the termination of the marital trusts and distribution of QTIP to S did not result in a taxable gift and (2) neither did S‘s sale of the C shares in exchange for promissory notes.
R filed a competing Motion for Partial Summary Judgment in effect arguing for the opposite conclusions.
Held: Assuming there was a transfer of property under
Held, further, E is not liable for gift tax on the sale of C shares for promissory notes because after the termination of the marital trusts S‘s qualifying income interest for life in QTIP terminated and
Held, further, E‘s Motion for Partial Summary Judgment will be granted.
Held, further, R‘s Motion for Partial Summary Judgment will be denied.
Randall L. Eager, William Benjamin McClendon, Richard C. Mills III, and Randall S. Trebat, for respondent.
OPINION
TORO, Judge: In this gift tax case, we are called upon to interpret complex provisions concerning the taxation of transfers between spouses. For many years, Congress has treated spouses as a single economic unit for estate and gift tax purposes. As an example, marital gifts between spouses generally are not subject to the gift tax. See
But this treatment is subject to exceptions. For example, the marital deduction generally is unavailable for a temporary interest (such as a lifetime interest) passed to a surviving spouse. See
Congress has, however, provided an option for taxpayers seeking to bequeath temporary interests to their spouses while still taking advantage of the marital deduction. Such circumstances are governed by the “qualified terminable interest property” (QTIP) regime.
Here we must decide what happens when taxpayers subject to the QTIP regime take steps to conform their actual legal arrangements to the regime‘s legal fiction. Specifically, the parties’ Cross-Motions for Partial Summary Judgment address the treatment of interests in property designated to be treated as QTIP when Alvin Anenberg (Alvin), the husband of Sally J. Anenberg (Sally), passed away. The underlying property was held in trust. Following Alvin‘s death, Sally obtained a qualifying income interest for life, and, upon her death, the remainder interests in the corpus would contingently go to trusts for the benefit of Alvin‘s children. But eventually, with the consent of both Alvin‘s children and Sally, the trusts holding the underlying property were terminated by a state court and all the property held by the trusts was distributed to Sally, putting her in the position she would have been in if all that property had originally passed from Alvin to her. Sally later gifted and sold different pieces of the underlying property to Alvin‘s children and grandchildren. Eventually, Sally passed away, leaving the gift tax consequences of these transactions to be resolved by her estate (Estate).
In his Motion, the Commissioner of Internal Revenue (Commissioner) argues that, under section 2519, the transactions we just described resulted in gift tax liability for Sally. The Estate disagrees in its own Motion. For reasons we describe further below, we agree with the Estate.3 We will therefore grant partial summary judgment in favor of the Estate and deny the Commissioner‘s Motion.
Background
The following facts are derived from the parties’ pleadings and Motion papers, the First, Second, and Third Stipulations of Fact, and
Sally was married to Alvin. Alvin had two sons from a prior marriage: Steven and Neil R. Anenberg (Neil). Alvin also had five grandchildren.
In 1971, Sally, Alvin, and an unrelated third party formed the Al-Sal Oil Company (Al-Sal). In time, Alvin and Sally came to own 100% of the shares of Al-Sal. Al-Sal owned and operated gas stations, principally in Los Angeles. Steven, Neil, and one of Alvin‘s grandchildren became more involved in the company as it grew, ultimately taking on corporate leadership roles.
In 1987, Sally and Alvin formed the Anenberg Family Trust, a revocable trust. Among the assets held by the Anenberg Family Trust were 100% of the shares of Al-Sal. The Anenberg Family Trust provided for the creation of various subtrusts upon Alvin‘s death, including two marital trusts (Marital Trusts). It also provided the trustee of the Marital Trusts with discretion to elect to treat certain property held in the Marital Trusts as QTIP under section 2056(b)(7) and claim a corresponding marital deduction.
In March 2008, Alvin passed away, survived by Sally, his children, and his grandchildren. As a result of Alvin‘s passing, various assets from the Anenberg Family Trust passed to the Marital Trusts, including 199 shares of Al-Sal (out of 400 total outstanding shares), representing a 49.75% interest in the company.5 Additionally, some cash and a 50% interest in Sally and Alvin‘s home passed to the Marital Trusts. In relevant part, the Anenberg Family Trust directed that all income from the Marital Trusts be paid out to Sally at least annually
In 2009, Steven, as the executor of Alvin‘s estate, filed Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. On the return, the estate elected to treat the property in the Marital Trusts as QTIP under section 2056(b)(7). Alvin‘s estate then claimed a corresponding marital deduction for the value of the property.
In October 2011, Steven, in his capacity as trustee of the Marital Trusts, petitioned the Superior Court of California for the Central District of the County of Los Angeles (Superior Court) to terminate the Marital Trusts pursuant to
In March 2012, the Superior Court issued an order approving the petition to terminate the Marital Trusts. As of March 2, 2012, the fair market value of the Mаrital Trusts’ property was $25,450,000, and the fair market value of Sally‘s income interest was $2,599,463. The Superior Court‘s order stated that, “[o]n proof made to the satisfaction of the Court, the Court finds that all notices of hearing have been given as required by law and that all allegations in the petition are true.” Stipulation of Facts Ex. 16-J, at 1. The Superior Court then terminated
In August 2012, Sally made a gift to each of the trusts of Steven and Neil of some of the Al-Sal shares she received upon the termination of the Marital Trusts. The fair market value of each of these gifts for federal gift tax purposes was $1,632,622.
In September 2012, Sally sold virtually all of her remaining Al-Sal shares (including the shares from the Marital Trusts and shares from one or both of her other trusts) to various trusts created for the benefit of Alvin‘s children and grandchildren. In return, she received nine-year promissory notes in amounts equal to the value of the Al-Sal shares and bearing annual interest at the applicable federal rate.9 These promissory notes were secured by interests in the Al-Sal shares and were partially guaranteed. The promissory notes were payable in installments and “[a]ll outstanding principal and accrued and unpaid interest” on the promissory notes was to be “paid on September 1, 2021.”
For the 2012 tax year, Sally timely filed Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. On the gift tax return, she reported the gifts of Al-Sal shares she made to Steven and Neil. She also took the position that the September 2012 sales of the Al-Sal shares to the various trusts for Alvin‘s heirs did not result in gift tax.
The Commissioner examined Sally‘s 2012 gift tax return. On December 1, 2020, he issued a Notice of Deficiency to Sally‘s Estate as Sally died in 2016. The Commissioner determined that the Estate was liable for a gift tax deficiency of more than $9 million as a result of the termination of the Marital Trusts and the subsequent sales of the Al-Sal shares. The Commissioner also determined an accuracy-related penalty of over $1.8 million.
The Estate filed a Motion for Partial Summary Judgment on May 4, 2023, asking us to determine “that (i) the termination of the Marital Trusts and the distribution of the assets of the Marital Trusts to Sally did not result in a deemed gift under [section] 2519; [and that] (ii) Sally‘s sale of the Al-Sal shares received from the Marital Trusts in exchange for promissory notes did not result in a deemed gift under [section] 2519.” Pet‘r‘s Mot. Summ. J. 3. The Commissioner filed his own Motion for Partial Summary Judgment on July 7, 2023, asking us in effect to reach the opposite conclusions. After briefing was completed, we held a hearing on the Motions on February 21, 2024.
Discussion
I. Summary Judgment Standard
The purpose of summary judgment is to expedite litigation and avoid costly, time-consuming, and unnecessary trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). The Court may grant summary judgment when there is no genuine dispute as to any material fact and a decision may be rendered as a matter of law. Rule 121(a)(2); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff‘d, 17 F.3d 965 (7th Cir. 1994). In deciding whether to grant summary judgment, we construe factual materials and inferences drawn from them in the light most favorable to the adverse party. Sundstrand Corp., 98 T.C. at 520. The parties agree that summary adjudication is appropriate here.
II. General Legal Principles
A. The Marital Deduction
Upon the death of a citizen or resident of the United States, section 2001(a) imposes tax on the taxable estate transferred to the decedent‘s heirs. In computing the amount of the taxable estate, the value of property passing from the decedent to his or her surviving spouse is generally deductible. See
Ordinarily a marital deduction is not allowed for terminable interest property passing from the decedent to the surviving spouse (terminable interest rule). See
B. QTIP Regime
Section 2056(b)(7) provides an exception to the terminable interest rule for QTIP. See Estate of Morgens v. Commissioner, 678 F.3d at 771 (“The QTIP [regime] is an exception to an exception to an exception.“). The provision allows a marital deduction for QTIP even though the surviving spouse receives only an income interest and has no control over the ultimate disposition of the property. See id. In other words, under section 2056(b)(7), the decedent may pass to the surviving spouse an income interest in property for the spouse‘s lifetime while still being permitted to deduct the full value of the property (not just the value of the income interest) from the decedent‘s taxable estate. After the death of the surviving spouse, the property passes to beneficiaries designated by the first spouse to die. See Estate of Morgens v. Commissioner, 678 F.3d at 771.
Other Code provisions continue the fiction that the surviving spouse owns the QTIP outright to ensure that, if not consumed by the surviving spouse during her lifetime, the QTIP ultimately is subject tо either the estate or gift tax. See Estate of Sommers, 149 T.C. at 223. Specifically, section 2044 requires that, upon the surviving spouse‘s death, the value of her gross estate include the value of any QTIP.11 And as a corollary, section 2519 addresses dispositions of a qualifying income interest for life in any QTIP during the surviving spouse‘s lifetime, triggering potential gift tax in certain circumstances. Operating together, these provisions generally mean that a QTIP election produces the same tax outcome that the marital deduction would have if the surviving spouse in fact owned the QTIP—namely, deferral until the surviving spouse dies or conveys his or her interest in the QTIP by gift.
Of particular relevance here is section 2519, addressing dispositions of QTIP during the surviving spouse‘s lifetime. In relevant part, section 2519 provides as follows:
Sec. 2519(a). General rule.—For purposes of this chapter [imposing the gift tax] and chapter 11 [imposing the estate tax], any disposition of all or part of a qualifying income interest for life in any [QTIP] shall be treated as a transfer of all interests in such [QTIP] other than the qualifying income interest.
Accordingly, for gift and estate tax purposes, section 2519 treats any disposition of the surviving spouse‘s income interest in QTIP as if the surviving spouse transferred 100% of the remainder interests in QTIP.12 In this case, we consider section 2519 in the gift tax context.
C. Gift Tax Regime
The Code “taxes ‘the transfer of property by gift.‘” United States v. Irvine, 511 U.S. 224, 232 (1994). The gift tax is imposed by section 2501(a)(1). As relevant here, it provides: “A tax, computed as provided in section 2502, is hereby imposed for each calendar year on the transfer of property by gift during such calendar year by any individual ....” Under section 2502(a), the gift tax is computed on the amount of a taxpayer‘s “taxable gifts” for current and preceding periods. Section 2503(a), in turn, defines “taxable gifts” to mean “the total amount of gifts made during the calendar year, less [certain] deductions.”
The gift tax generally applies “whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible.”
As the foregoing provisions show, a transfer by gift is a foundation for the imposition of gift tax. But, despite the Code‘s liberal use of the term “gift” throughout the relevant provisions, it is not statutorily defined. Consistent with the common understanding of the term, however, the Supreme Court has described “gift in the statutory sense . . . [as] proceed[ing] from a ‘detached and disinterested generosity’ . . . ‘out of affection, respect, admiration, charity or like impulses.‘” Commissioner v. Duberstein, 363 U.S. 278, 285 (1960) (first quoting Commissioner v. LoBue, 351 U.S. 243, 246 (1956); and then quoting Robertson v. United States, 343 U.S. 711, 714 (1952)). And our Court and the governing regulations have explained transfers in exchange for full and adequate consideration are not gifts. See, e.g., Estate of Redstone v. Commissioner, 145 T.C. 259, 269 (2015); see also
III. The Parties’ Dispute
The parties agree that, following Alvin‘s death, Sally owned a qualifying income interest for life in QTIP (including the lifetime income interest in the Al-Sal shares). But they disagree on the application of section 2519 to Sally‘s 2012 transactions with respect to the Al-Sal shares.
Specifically, the Commissioner contends that Sally disposed of her qualifying income interest for life in the QTIP within the meaning of section 2519 at one of two times: (1) when Sally agreed to the termination of the Marital Trusts and accepted the Marital Trusts’ distribution of a complete ownership interest in all the Trusts’ assets, including the Al-Sal shares or (2) when Sally, having accepted the shares from the Marital Trusts, sold them in exchange for promissory notes. In the Commissioner‘s view, either one of these two events was a “disposition” sufficient to trigger section 2519. The Commissioner therefore contends that Sally is treated as transferring the full value of the QTIP (the Al-Sal shares) less the value of her qualifying income interest as a gift, resulting in a gift tax liability of more than $9 million and related penalties.
Unsurprisingly, the Estate disagrees with the Commissioner, arguing that neither event was a disposition within the meaning of
As we explain below, we agree that Sally did not make a gift as the Commissioner contends and therefore resolve the Motions in the Estate‘s favor.
A. Receipt of the Al-Sal Shares
There is some question as to whether the termination of the Marital Trusts (through which Sally held her qualifying income interest for life in the Al-Sal shares) and the distribution of the Al-Sal shares to Sally by order of the Superior Court was a disposition within the meaning of section 2519(a).13 See, e.g., Rome I, Ltd. v. Commissioner, 96 T.C. 697, 704 (1991) (discussing the plain meaning of the term “disposition“); see also Disposition, Black‘s Law Dictionary (5th ed. 1979) (“Act of disposing: transferring to the care of possession of another. The parting with, alienation of, or giving up property.“).14 But we need not
As we have discussed, section 2519 provides that, if Sally disposed of all or part of her qualifying income interest for life in the Al-Sal shares, then, for purposes of determining her gift tax liability, she is treated as transferring all the interests in the Al-Sal shares other than her qualifying income interest.15 So far, so good.
A transfer alone, however, is insufficient to create a gift tax liability. Rather, section 2501 tells us that gift tax applies “on the transfer of propеrty by gift during [the] calendar year.”
Applying these principles to this case is simple. If we assume that Sally‘s relinquishment of her interest in the Marital Trusts in exchange for the Al-Sal shares was a disposition, section 2519(a) treats her as having transferred away (but not necessarily by gift) all the interests in the Al-Sal shares other than her qualifying income interest. See also
This task turns out to be straightforward. To determine whether Sally made a gift, in connection with the deemed transfer, we compare what she had before and after the transaction. When doing so, we find
A conclusion that Sally made a taxable gift in the circumstances here would be difficult to reconcile with the regulations under section 2511. Those regulations explain that the gift tax “is an excise upon [her] act of making the transfer [and] is measured by the value of the property passing from the donor.”
If one examines “all the facts in [Sally‘s] particular case,” as the regulations contemplate, it would be difficult to avoid concluding (as we already have) that she made no taxable gift. First, consideration of all the facts shows that, even if we deem Sally to have transferred the remainder interests, no value would appear to have passed from her to anyone else because she ultimately received all the property held by the Marital Trusts as part of the same transaction, leaving nothing on which the “excise” could operate. See id. para. (a). Second, Sally‘s decision to agree to the termination of the Marital Trusts was conditioned on her receipt of the property held by the Marital Trusts. While (we assume) that decision could be viewed as a disposition that is treated as a transfer under section 2519, it is not clear how Sally could be viewed as having “parted with dominion and control as to leave in [her] no power to change its disposition.”
Treasury Regulation § 25.2511-2(c) points the same way. It provides that “[a] gift is incomplete in every instance in which a donor reserves the power to revest the beneficial title to the property in [herself].” Here, in agreeing that the Marital Trusts be terminated, Sally was assured that she would receive the assets held by the trusts. While not cast in the form of a reserved power, one might view the arrangement presented to the Superior Court as amounting to Sally‘s agreeing to part with her qualifying income interest for life (and to the deemed transfer of the remainder interests in the QTIP) on the condition that she was reserving the power to revest title in the property in herself, a power that was promptly exercisеd upon the termination of the Marital Trusts.
Consideration of section 2512 further confirms the conclusion that Sally did not make a taxable gift. In explaining how gifts should be valued for purposes of the gift tax, section 2512(b) provides that, if property is transferred for less than full and adequate consideration, then the amount by which the property‘s value exceeds the value of the consideration is a gift. A necessary corollary of this rule is that no taxable gift results to the extent the value of transferred property is equal to or less than the value of the consideration received. See, e.g., Estate of Redstone, 145 T.C. at 269.
Considering the circumstances that existed when the Superior Court directed the trustee of the Marital Trusts to transfer all of the assets of those trusts to Sally free and clear, we see the following. Before the termination of the Marital Trusts, Sally held a qualifying income interest for life in the QTIP. She was deemed for estate and gift tax purposes to hold the remainder interests as well. But these interests, even when considered together, did not equate to unencumbered ownership. She was not free to do what she wished with the QTIP, which was held in the trusts. After the Superior Court order, Sally received the QTIP free of any trust restrictions. In these circumstanсes, to the extent section 2519 viewed Sally as transferring away the interests in property that the QTIP regime treated her as holding in the first place, it is hard to understand why Sally would not have received full and adequate consideration in return when she was also at the receiving end of the transfer of the property unencumbered. Before the Marital Trusts terminated, she actually held an income interest in the Marital Trusts’ property valued at approximately $2.6 million, but was
In sum, when looking for a gratuitous transfer in the circumstances here, one comes up short. Simply put, Sally made no gift.18 So, while (we assume) there was a transfer, there was no transfer of property by gift, a predicate for the Code‘s imposition of gift tax. See
B. Exchange of the Al-Sal Shares for Promissory Notes
Neither does the gift tax apply to Sally‘s subsequent sale of the Al-Sal sharеs in exchange for promissory notes. For at least two reasons, that transaction could not have triggered section 2519(a).
First, if the termination of the Marital Trusts and distribution of the Trusts’ assets to Sally constituted a disposition of her qualifying income interest for life in QTIP, as we assume above, then that event would already have triggered section 2519. Thus, section 2519 would no longer apply at the time Sally sold the shares.19 Essentially, Sally would have already satisfied the requirements of the QTIP regime, and her future transactions in the Al-Sal shares would be covered by the ordinary estate and gift tax rules rather than the QTIP regime.
Second, even if the termination of Marital Trusts and the distribution of QTIP to Sally was not a disposition, Sally‘s qualifying income interest for life in the QTIP would still have ceased to exist at
It is axiomatic that a surviving spouse must hold a qualifying income interest for life to implicate section 2519. Such a property interest is defined by the Code and exists only when the surviving spouse is entitled to all income from the property, payable annually or more frequently, or has a usufruct interest for life in the property, and no person (including the surviving spouse) has the power to appoint аny part of the property to any person other than the surviving spouse (unless such power is exercisable only after the death of the surviving spouse). See
C. The Commissioner‘s Arguments
1. Checking Out of the QTIP Regime
The Commissioner argues that, when section 2519 is triggered, the surviving spouse automatically owes gift tax on the full value of the QTIP (less the value of the qualifying income interest) regardless of what happens with the QTIP or any consideration the surviving spouse receives as part of the transfer. In other words, according to the Commissioner, “once the estate of the first spouse to die irrevocably
In onе version of this argument, the Commissioner asserts that section 2519 itself “imposes gift tax.” R. Memo. 4. But of course the text of the Code makes plain that this is not the case. Instead, section 2519 deems a transfer to be one upon which section 2501 may impose gift tax, but only if the requirements of the latter section are met. Among those requirements is that a transfer be “by gift” to create a gift tax liability. See
Repeatedly, the Commissioner ignores the textual limits of section 2519(a). Specifically, the provision says only that a disposition “shall be treated as a transfer” and not that it shall be treated “as a transfer by gift” or “as a gift.” Congress could have used either formulation to ensure the imposition of gift tax regardless of what happens with the QTIP or the consideration the surviving spouse receives, but it did not. And it made this choice despite the frequent use of the phrase “transfer by gift” in neighboring provisions, including in section 2501 itself. See, e.g.,
This outcome also makes sense in context. Recall that, working together, section 2519 and section 2044 generally operate to ensure that QTIP is treated the same as nonterminable interest property (i.e., regular property) for purposes of the marital deduction—namely, not eliminating or reducing tax on the transfer of marital assets out of the marital unit, but rather permitting deferral until the death of or gift by the surviving spouse. Where, as here, a surviving spouse receives the
The Commissioner highlights various cases, rulings, and examples from the regulations that he says require gift tax to be imposed whenever a surviving spouse disposes of her qualifying income interest in QTIP. R. Memo. 29, 31-32 (citing Estate of Morgens v. Commissioner, 678 F.3d at 771; Estate of Novotny, 93 T.C. at 18; Estate of Kite, T.C. Memo. 2013-43; Order and Decision at 8–9, Estate of Kite, T.C. Memo. 2013-43 (No. 6772-08);
By contrast, here Sally‘s receipt of the QTIP (and later the promissory notes) preserves the value of the marital assets in her hands for future gift or estate taxation. See Estate of Novotny, 93 T.C. at 16, 17–18; see also
The termination of the Marital Trusts is similar to an appointment of the assets of the Marital Trusts to Sally—i.e., an assignment of ownership in the assets to her. See, e.g.,
2. Treasury Regulation § 25.2519-1(a)
The Commissioner cites Treasury Regulation § 25.2519-1(a) as confirming his view that gift tax is imposed anytime a surviving spouse disposes of a qualifying income interest in QTIP. That regulation states as follows:
Treas. Reg. § 25.2519-1(a). In general. If a donee spouse makes a disposition of all or part of a qualifying income interest for life in any property for which a deduction was allowed under section 2056(b)(7) or section 2523(f) for the transfer creating the qualifying income interest, the donee spouse is treated for purposes of chapters 11 and 12 of subtitle B of the Internal Revenue Code as transferring all interests in property other than the qualifying income interest. For example, if the donee spouse makes a disposition of part of a qualifying income interest for life in trust corpus, the spouse is treated under section 2519 as making a transfer subject to chapters 11 and 12 of the entire trust other than the qualifying income interest for life. Therefore, the donee spouse is treated as making a gift under section 2519 of the entire trust less the qualifying income interest, and is treated for purposes of section 2036 as having transferred the entire trust corpus, including
that portion of the trust corpus from which the retained income interest is payable. A transfer of all or a portion of the income interest of the spouse is a transfer by the spouse under section 2511. See also section 2702 for special rules applicable in valuing the gift made by the spouse under section 2519.
The Commissioner may be focused on the third sentence. But the third sentence does not say that transfers under section 2519(a) are always treated as gifts. Rather, it completes the example posited by the second sentence, in which the donee spouse has disposed of part of a qualifying income interest for life, presumably for no consideration or for consideration matching the value of the disрosed-of partial interest. (That is why the third sentence refers to the “trust corpus” rather than “property” and the donee spouse‘s “retained income interest.“) In the circumstance posited by the second sentence (which makes no mention of the donee spouse receiving anything in return in connection with the disposition), the third sentence correctly recognizes that the donee spouse is treated as making a gift of the entire trust less the qualifying income interest.26
The third sentence, however, does not state a general rule for all section 2519 purposes.27 Rather, the general rule is found in the regulation‘s first sentence, which provides simply that “the donee spouse is treated as transferring all interests in property other than the qualifying income interest.”
The Commissioner also makes much of Estate of Kite, T.C. Memo. 2013-43. In that case, we considered a surviving spouse (Mrs. Kite) who, like Sally, acquired an income interest in QTIP upon the death of her spouse. Id. at *36. The QTIP was held in a trust. Eventually that trust was terminated, and the entire interest in the trust property was distributed to another trust created for Mrs. Kite‘s benefit. Id. at *39. Two days later, Mrs. Kite‘s trust sold the entirety of the property to her spouse‘s children, receiving private annuity agreements in return. Id. at *39-40. In relevant part, the private annuity agreements were unsecured, and the first payments were not due until 10 years after the sale. Id. at *40. The annuities were structured in such a way that, if Mrs. Kite (who was in her 70s at the time and receiving in-home medical care) died before the first payments were due, then “her annuity interest would terminate” and the income from the annuities (which the Court determined were adequate and full consideration for the qualified terminable interest property) would no longer be part of her gross estate and would escape estate tax. Id. at *13. And in fact, Mrs. Kite did die before any annuity payments were made. Id. at *17.
On these facts and assuming the form of Mrs. Kite‘s transactions were respected, the value of the QTIP that was deemed to pass to Mrs. Kite (and for which a marital deduction had been taken) would have escaped estate and gift tax altogether. Observing that the form of the transaction would allow Mrs. Kite‘s estate to “circumvent the QTIP regime” and “avoid any transfer tax,” this Court (at the Commissioner‘s urging) applied the substance over form doctrine to treat the transactions as one integrated transaction. Id. at *40–43. And, in doing so, the Court concluded that the termination of the trust and subsequent sale of property was a disposition for purposes of section 2519(a). Estate of Kite, T.C. Memo. 2013-43, at *41.
The case before us differs in material respects from Estate of Kite. To begin, the Commissioner has not asked that we apply the substance over form doctrine. Moreover, like the Commissioner‘s other authorities, Estate of Kite involved an apparent attempt to prevent estate or gift tax from ever being imposed on the residual value of the QTIP for which a marital deduction had been taken. Neither circumstance is present here, so Estate of Kite provides the Commissioner no help.
Citing Commissioner v. Wemyss, 324 U.S. 303 (1945), the Commissioner argues that, in the estate and gift tax context, “adequate and full consideration is that which replenishes, or augments, the donor‘s taxable estate.” R. Memo. 31. We fully agree with this simple proposition. See Commissioner v. Wemyss, 324 U.S. at 307 (“The 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.” (Alteration in original.)). But the Commissioner further contends that the receipt of the Al-Sal shares could not “enhance or augment [Sally‘s] taxable estate” and therefore could not constitute full and adequate considеration in her hands. R. Memo. 33. With respect to this second proposition, we could not disagree more.
The Commissioner reasons that, before the termination of the Marital Trusts, the value of the Al-Sal shares was already includible in Sally‘s taxable estate. See
To take a step back, it is true that, under the QTIP regime, the value of the Al-Sal shares was includible in Sally‘s gross estate before the Marital Trusts were terminated and the shares were distributed. But the Commissioner urges us to conclude (and for purposes of our decision we assume) that the termination of the Marital Trusts was a disposition that triggered section 2519(a). So, when the Marital Trusts terminated, section 2519(a) deemed Sally to have transferred away all the interests in the Al-Sal shares other than her qualifying interest for life. Or, put another way, section 2519(a) deemed Sally as giving up the remainder interests that she previously was deemed to have received from Alvin. This in turn resulted in a (temporary, as we will momentarily see) diminution of her estate.
But the transaction did not stop there, and our analysis is not yet finished. The Superior Court ordered that all of the property held by the Marital Trusts be distributed to Sally. And that is what happened. Thus, promptly after Sally was deemed to have transferred away the remainder interests in the Al-Sal shares, she received right back outright ownership of the Al-Sal shares. The receipt of those shares “replenished” or “augmented” her (temporarily) diminished estate. In
The Commissioner would have us treat the circumstances here the same from a gift tax perspective as we would treat a termination of the Marital Trusts that was followed by a hypothetical distribution to Sally of the value of her qualifying income interest only, with the value of the remainder interests distributed to Steven and Neil. But the two situations are not remotely the same.29 See, e.g., Merrill v. Fahs, 324 U.S. 308, 311 (1945) (“The guiding light is . . . [that] ‘[t]he gift tax [i]s supplementary to the estate tax. The two are in pari materia and must be construed together.‘” (quoting Estate of Sanford v. Commissioner, 308 U.S. at 44)).
To summarize, in each of the Commissioner‘s cited sources, imposing the estate or gift tax resulted in one-time taxation of the value of the remainder interests in QTIP at the time that value left (or was deemed to leave) the surviving spouse‘s hands. This is fully consistent with the QTIP regime and the marital deduction, which, again, do not eliminate or reduce the tax on the transfer of marital assets out of the marital unit, but rather permit deferral until the death of or gift by the surviving spouse. See Estate of Morgens, 133 T.C. at 410. In short, the authorities the Commissioner cites do not support his position.
IV. Conclusion
For the reasons discussed above, we will grant the Estate‘s Motion for Partial Summary Judgment and deny the Commissioner‘s Motion.
To reflect the foregoing,
An appropriate order will be issued.
Reviewed by the Court.
KERRIGAN, FOLEY, BUCH, NEGA, PUGH, ASHFORD, URDA, COPELAND, JONES, GREAVES, MARSHALL, and WEILER, JJ., agree with this opinion of the Court.