Estate of Stewart v. Commissioner

by Judge Kahn. What remedy described la- concerned about—whether

Cayuga was remedy—was avoiding

beled claim of ancient land titles

undue disturbance regarding them. expectations

and settled remedy recognized by the

The claims and case, pursued now

district court this States, by the

by the United Oneidas this no such disturbance. With

involve

decision, plaintiffs forecloses any seeking claims bringing treatment at the hands of

remedy for them required This is not Sherrill

the State. Cayuga, contrary spirit to the very Supreme decisions Court’s Therefore, I dissent and would af-

case. carefully de- Judge

firm Kahn’s considered judg- denying summary

cision and order

ment to the State. Margot STEWART, De

ESTATE OF

ceased, Stewart, Brandon Execu

tor, Petitioner-Appellant, INTERNAL

COMMISSIONER OF

REVENUE, Respondent-

Appellee. 07-5370-ag.

No.

United Court of Appeals, States

Second Circuit.

Argued: Nov. 2008. Aug.

Decided: Bernstein, (Jerry

Jennifer S. Smith D. brief), LLP, on the Blank Rome New York, NY, Petitioner-Appellant. for (Jonathan Cohen, Randolph L. Hutter S. brief) Hochman, on the for Nathan J. As- General, Division, Attorney sistant Tax Justice, Department of Washington, U.S. D.C., Respondent-Appellee. McLAUGHLIN, CALABRESI, Before: LIVINGSTON, Judges. Circuit CALABRESI, Judge: Circuit Decedent, Stewart, Margot gave 49% of a building share mixed-use to her son (“Brandon”). Brandon Upon Stewart death, Margot Stewart’s the Internal Rev- enue sought gift Service include this Margot Stewart’s estate under 26 U.S.C. 2036(a)(1), reasoning Stew- ... art had “retained for life [her] of, right to or the property.” the income from the The Tax Court, Memo T.C. T.C.M. (CCH) 357, agreed. Petitioner-Appellant (the “Estate”) Estate of Stewart decision, appeals arguing that Dece- retain a dent did not lifetime interest no im- 49% share and there was plied agreement that Decedent would re- tain 49% share. Commissioner contends decision was correct. do not Court’s We finding disturb the Tax Court’s that an existed, implied agreement but we hold clearly that the Tax Court erred (the “Manhattan property”), hattan terms that the bought Decedent had 1968. On October would retain en- Decedent provided that upper Decedent leased the three share, and that entire joyment of the I. tenant, floors to an unrelated commercial remain in the property should the entire (“Financial Solutions, Financial Ltd. Solu- judg- VACATE the Estate. We therefore tions”). month, $9,000 per The rent was REMAND this case for ment below and 31, through July and the term ran 2002. consistent with this proceedings further opinion. II. The Gift

Facts 1, 1999, Decedent and Bran- On October Walker, Attorney don met with Frederick Properties I.The Two planning specialist, pur- for the 1989, Decedent Since Stewart pose reviewing the Financial Solutions son Brandon co- and her adult Stewart According testimony, lease. to Walker’s owned, joint rights tenants with of sur- Decedent asked him what to do about the vivorship, Hampton, a house East New appreciation in the value of the Manhattan (the property”). Hampton York “East suggested property, Walker De- Decedent, summer, and Brandon Each gift cedent make a of the Manhat- Hampton property, rented out the East tan to Brandon. Decedent then evenly. income As a splitting rental give said she wanted to Brandon half convenience, De- expediency matter of property along of the Manhattan with half sign Brandon would not both cedent and of the rent. This account is corroborated lease; they nor would ask the summer contemporaneous diary, Walker’s checks, tenant to send two different rent says give that Decedent “to son wanted one to Decedent and one to Brandon. Walker, one-half of building and rent.” Rather, years, in different either Decedent Decedent, again and Brandon met the next sign the or Brandon would lease to rent day so that Decedent and Brandon could out the and the would tenant up pick the lease and further discuss the single write a check either to Decedent or gift possibility with Walker. to Brandon. received the rent Whoever diagnosed pancreatic Decedent was then, year every checks that few cancer in began December and she months, write a check to the other for that chemotherapy January treatments 2000. n

person’s share. Decedent and Brandon May On Decedent and Brandon split evenly expenses of maintain- also signed a in- deed transferred a 49% ing Hampton property. the East The re- terest in the Manhattan Bran- Property to every sult was that summer each of Dece- provided don.1 The deed that Decedent dent and Brandon received half of the and Brandon would be tenants in common. East Hampton property’s net income. (cid:127) III. After the Gift At all appeal, times relevant to this De- cedent and on the gift Brandon lived first two After the completed, Decedent five-story floors of a together brownstone Man- and Brandon continued to live Below, *4, argued 1. the Commissioner that the and the does not Commissioner cross- gift completed was not until after Decedent's appeal Accordingly, that determination. death, yet because deed been purposes, our the transfer of the rejected argu- recorded. ment, May in Manhattan occurred on Stewart, WL 2000. *l-*2, 2006 Tax Ct. Memo LEXIS at *3- two floors of the Manhattan counted for in the lower Brandon’s and Decedent’s statements, Financial continued to Solutions bank and the numbers up. add floors, upper rent three but its rent erratic, untimely, were

payments IV. Decedent’s and Tax Death Conse- addition, according partial.2 sometimes quences (which testimony to Brandon’s is corrobo- Stewart died on November documentation), by financial rated Following death, the estate filed underwent thousands with the a Form IRS United States result, repairs. of dollars worth of As a (and Generation-Skipping Trans- property the Manhattan were expenses fer) Return, Tax which reported the con- usual, than significantly higher at the same Margot’s tents of estate as including 100% produced by time that the income of the East Hampton property4 but property became unreliable. 51% interest Manhattan Against backdrop, this the financial rela- 22, 2004, On December the IRS issued a tionship between Decedent and Brandon alia, notice of deficiency stating, inter significant underwent several changes dur- Margot had retained or enjoy- ing period gift after the and before ment of the transferred 49% interest and Decedent’s death.3 While Decedent con- therefore, § under 26 U.S.C. tinued to receive the Manhattan entire Manhattan of her payments Solutions, rent from Financial estate for federal tax purposes. payments Brandon received the rent from The timely Estate filed a petition in the the tenant in the Hampton property. East challenging the IRS’s determi- previous In contrast to their practice, deficiency. nation of The Tax Court held Brandon never wrote a check to Decedent a two-day trial, trial in June 2006. At for her share of the Hampton East rent. argued Decedent, contrary who had to the IRS’s previously paid for all contention, Decedent Manhattan had not retained expenses, paid now them, enjoyment or income of for most of with the entire Manhat- paying Brandon rather, tan property owner, small but not but insignificant fraction. The as a 51% paid forgone Tax Court found that Decedent much of the net Man- income from $21,790.85, property expenses top hattan three using floors a setoff to paid Brandon, while Brandon expenses pay and had shared the value of $1,963. supports The record by living these find- the bottom two with Brandon. ings; every one of payments Estate, these is ac- According to the split- instead of 30, 2001, Eventually, August on or about is no credibility basis for us to disturb this Financial Solutions defaulted on the lease and appeal. on determination See Anderson v. was evicted. 564, 575, City City, Bessemer 470 U.S. (1985); S.Ct. L.Ed.2d Ceraso 3. Brandon testified that he and Decedent LLC, Enterps., Motiva 326 F.3d 316-17 made an oral to reconcile the in- (2d Cir.2003). expenses Prop- come and from the Manhattan - erty Hampton property. East He also Hamp- 4.While Decedent had owned the East May spent testified that after he twice property jointly ton Brandon since with managing prop- as much time the Manhattan she still owed estate tax on of its value erty repairs previously tenant as he had. jointly it because was held of sur- disregard testimony We will because the 2040(a). vivorship. § See 26 U.S.C. credible,” Tax Court found "not and there expenses rental income Discussion up the

ting to their interests proportion each month Legal I. Framework process which properties—a two imposes The Internal Revenue Code Decedent and Bran- required have every federal tax on “the taxable estate of every checks for separate don to write decedent who is a citizen or resident of the separate checks from receive expense and 2001(a). § A States.” 26 U.S.C. United and Brandon both tenants—Decedent “the value “taxable estate” is defined as net person’s track of each keeping were estate,” applicable gross less deduc- properties and intended income both tions, § where the value of the id. at the any differences end to reconcile prop- estate includes “the value of all year. erty to the extent of the interest therein of death,” the decedent the time his id. a memorandum Tax Court issued taxpayers plan- 2033. Some use various petition. T.C. Memo opinion denying techniques designed ning take (CCH) 357, T.C.M. 2006 WL out of the decrease its 3018173, Memo 2006 Tax Ct. LEXIS 230. statutory value. The IRS has several that Decedent “continued The court found fighting techniques. tools to use in these $9,000 monthly pay- rent receive the these tools—26 One U.S.C. Solutions, Ltd., Financial ments from 2036(a)(1)—is § at issue here. benefits of the enjoy [Man- the economic *2, Id. at 2006 Tax Ct. property.” hattan] 2036(a)(1) A. Section 230, at *6. The court de- Memo LEXIS 2036, § Internal Under Revenue Code prop- Decedent’s “retention of the scribed gross the value of the estate includes “the property after the erty’s income stream property any of all to the extent of value “very was transferred” as clear evidence interest therein of which the decedent has ‘pos- that the decedent did indeed retain a ... at time made transfer under ” enjoyment.’ Id. Because there session ... which he has retained for his life agreement was no written between Dece- of, or the stating they dent and Brandon from, the property.” the income 26 U.S.C. income and expenses reconcile the (a)(1). 2036(a), § purpose § The of 2036 is the Tax properties two and because prevent using gift individuals from a testimony did not credit Brandon’s property transfer of with reservation of a agreement, there an oral the court was any similar device—in order life estate—or agreement found that no such existed. Id. having to tax. pay to avoid See 2-3, 2006 Tax Ct. Memo LEXIS at Church, Comm’r Estate 335 U.S. Rather, Tax *7. Court concluded that (1949). 69 S.Ct. 93 L.Ed. 288 Decedent “had an Brandon and § a could transfer Absent decedent agreement that decedent would retain the property to her heir the remainder prop- economic benefits of the [Manhattan] estate, retaining a life and the eco- while erty” certainly “Decedent met the substantially would be identi- nomic result agreement.” terms of that Id. For those cal what would have occurred if the full reasons the Court held that the property decedent had left the to the heir property in- value of the Manhattan so her will under irrevocable contract cludible in the Estate under 26 U.S.C. By property in the including to do. -such estate, § timely appealed § 2036. The Estate closes what would time was—an otherwise be—and one Court. Brandon, loophole enormous in the estate tax.5 Id. it followed under 26 U.S.C. 2036(a)(1) § that the 49% share was Retention of formal life estate of the Estate. just property taxpayer one method a try paying use to to avoid might the estate substance, achieving, Planning

tax B. Technique while the same in This result occur if economic as would she re Case property tained the for life and dis § Today, enacted, unlike when 2036 was of it will. Another posed method is to supra see note the estate tax and the (even make an an implied or gift tax are on a unified rate schedule.6 agreement) unenforceable between a dece And, presumably, gift Decedent owed a tax dent and inter vivos transferee that the as of the time she transferred the 49% enjoy decedent will continue to the bene in the See fits of the for her life. Not sur J.A. (noting that the gift Estate filed a prisingly, courts the IRS have transfer). tax return then, for this Why, that if an agreement, ruled there is such does matter whether pays the Estate then the decedent is understood to have gift estate tax or tax on the transferred the possession retained 49% interest? Part of the answer is that and the must be the Commissioner wants to tax appre- included in the estate. See 26 ciation of Brandon’s share of the Manhat- 20.2036—1(c); C.F.R. Estate Maxwell tan during roughly 6-month Comm'r, (2d 3 F.3d 593-94 Cir. period from the date of the transfer to the 1993). date of Decedent’s death. appre- But the us, In the case before the Tax Court ciation of the entire Manhattan property found as a fact that when gave Decedent during period stipulated was to be 49% share of Manhattan property to $125,000, 71, applicable J.A. and the tax to Brandon, she did so with an implied agree- Brandon’s 49% share of that appreciation,

ment that she “would retain the economic trivial, though not probably not be If, benefits” the whole townhouse. as unduly large money.7 amount of held, the Tax Court Decedent retained the have, however, of the planners 49% share found a given highly she had way effective to lower both estate 7.Indeed, loophole 5. significant The reason the Congress so in 1981 when modified closely § when 2036 was enacted was that at that related statute 26 U.S.C. 2035(a), § gifts previously provided significantly time taxes on were which had lower years that most transfers within three of death than taxes on transferred in an es- estate, had to be included in the see 26 tate. See Boris I. Bittker & Lawrence Lok- 2035(a) (1980), § U.S.C. ken, the Senate Income, Finance Federal Taxation of Estates and Committee stated: ¶Gifts 126.41. generally The committee does not believe it theAs Joint Committee on Taxation ex- appropriate appreciation to tax that accrues plained applicable gift the law in 2000: "The gift after a has been made under the unified tax and the estate tax are unified so that a gift merely estate and taxes because the single graduated applies rate schedule to cu- years gift. died donor within 3 by taxpayer mulative taxable transfers made present rule often results in needless ad- during his or her lifetime and at death." valuing property ministrative burdens in Taxation, Description Joint Committee on twice. "The Death (1981), Tax Elimination Act Rep. 2000” reprinted S. No. at 138 (H.R. 8) (JCX-51-00), 23, 2000, May at 2. in 1981 U.S.C.C.A.N. 238-39. (a)(1). characterization of a general “The real estate passing when gift taxes purposes question tax is a Dividing the real transaction for generation. the next usually low- Frank subject interests to de novo review. separate into of law” States, market value and fair 435 U.S. property’s Lyon ers the Co. United taxes due on it.8 See thereby also n. 98 S.Ct. 55 L.Ed.2d al., Planning Law (1978). et David Westfall therefore determine We must ¶ (2009). The fair mar- us, 2.05[3] & Taxation means, in the context before what typically is separate interests ket value of ... “retain[ ] for lack of 10-20% discounted about from, of, right or the to the income In the in- marketability. Id. control and property.” case, however, parties stipulated stant matter, an initial we note As of 42.5% if the higher much discount to a statute, aspects applied two of this divided.9 J.A. had fact been case, beyond dispute. reasonable are responsible That discount is 71-72. First, right “the Decedent did not retain money at stake the lion’s share of property.” Retaining from[] income reason that the It is for this this case. to income is not the same as to hold that the wants us Commissioner Supreme retaining the income. As the interest is entirety of Brandon’s 49% interpreting explained Court has The Estate Decedent’s estate. 2036(a)(2), ‘right,’ certainly term “[t]he Decedent, though would then be taxed as statute, given in a tax must be when used of the Man- giving Brandon 49% instead customary meaning. It its normal and 9, 2000, May property on hattan legally en connotes ascertainable until the whole her death owned ” power.... forceable United States then on November 2000. And there Byrum, 408 U.S. 92 S.Ct. for lack of would be no 42.5% discount (1972). It undisputed 33 L.Ed.2d 238 marketability. control and en legally that Decedent did not have Enjoyment II. Continued Possession power forceable to receive the income in the interest the Manhattan The Tax concluded that De legally to Bran she had transferred ... en possession cedent “retained or Therefore, if of, don. Decedent “retained” right to the income joyment or the 2036(a)(1), 2036(a), § it was from, anything § described in property.” 26 U.S.C. buy having technique tax or to sell and both reasonable works because the estate This proper- imposed knowledge market value of is on the fair of relevant facts. ty, (b); to the Propstra § not on the value of 20.2031-1 see also 26 C.F.R. States, 1248, person inheriting (9th it—even if the latter amount United 680 F.2d 1251-52 greater is much because the heir owns Cir.1982) ("[W]e good see reason to consider complementary as the other asset such Reg. ‘willing Treas. seller’ mentioned in parcel real the two divided interests in a (b) hypothetical § as a seller rather 20.2031-1 Treasury Regulations property. ex- As the beneficia- than the estate or of decedent’s plain: .... Executors will not have to make deli- ries attitudes, feelings, inquiries into the cate every includ- The value of item holding anticipated undivid- sec- behavior of those ible in a decedent’s estate under question.”). through property 2044 is its fair market ed interests in the tions 2031 decedent's value at the time of express no view whether the dis- 9. We 42.5% price death.... The fair market value is the figure, or whether on re- count is a correct change property would at which the hands by bound its the Government remains willing buyer willing mand between a and a sell- er, any compulsion stipulation. being neither under

155 “possession enjoyment” or income. All the actual we have to do is follow the interest, any “right is, substance, and not money. Brandon’s Whoever receiv Second, (or proper- loss) from” it. “the ing to income taking net income the net 2036(a)(1) §in to the ty” here refers trans- property, using from the is it during his or lifetime, ferred 49% interest the Manhattan possessing thus and en property, not to the entire Manhattan joying property. See Estate McNi property. previously Comm’r, (3d The Tax Court has 667, chol v. 265 F.2d that a recognized Cir.1959); decedent’s formal and see also 26 C.F.R. 20.2036- 1(b)(2) (“The ‘use, substantial retention of a possession, right to the necessarily income, real does not re- enjoyment or other of the trans quire that the decedent retained property’ ferred is considered as having possession of a minority transferred inter- been retained or reserved to the decedent est, see, e.g., Estate Wineman v. use, to the extent that possession, right Comm’r, income, T.C. Memo 79 T.C.M. to the other is to be (CCH) 2189, 839962, *8-9, 2000 WL applied discharge toward the legal of a *24-25, Ct. Memo LEXIS obligation decedent, or otherwise for Therefore, benefit.”). agree. inquiry and we our pecuniary his limited to whether Decedent “retained ... applicable Under the Treasury Regula- of’ the trans- tions, however, a finding of “retained ... ferred 49% interest in the Manhattan enjoyment” is not the end of the matter. The extent of the retained possession or enjoyment must also be de- applying “possession or en termined. joyment” language §of 2036 “we look to substance, Church, not to form.” Estate If the decedent retained or reserved an (quoting

335 U.S. at 69 S.Ct. right interest or respect to all of Hallock, Helvering him, 309 U.S. the property transferred (1940)). S.Ct. 84 L.Ed. 604 “It is well amount to be included in his ‘enjoy’ ‘enjoy settled that the terms under section 2036 is the value of the ment,’ as used various estate tax stat entire less the value of utes, art, ‘are not terms of any outstanding but connote income interest which is present substantial economic rath subject benefit to the decedent’s interest or than vesting er technical of title or actually es and which is being en- ” Byrum, joyed tates.’ 408 U.S. at person S.Ct. another at the time of Holmes, (quoting 2382 Comm’r v. Estate the decedent’s death. the decedent of If 480, 486, 257, 326 U.S. 66 S.Ct. 90 L.Ed. retained or reserved an right interest or (1946)). “In 228 the case of real property, respect to a part only proper- of him, ‘possession’ ‘enjoyment’ terms ty by the amount to be transferred interpreted have been to mean ‘the life included in his estate under sec- ” property.’ time use of the only Estate tion 2086 is a corresponding pro- of Maxwell, 3 F.3d at (quoting Byrum, portion 593 the amount described in the of 2382). 408 U.S. 92 S.Ct. it preceding While sentence. An interest or may sometimes be difficult to determine right having is treated as been retained using property who is real that wholly is or reserved if at the time of the transfer inhabited family decedent there an understanding, express, was and/or members, quite easy is to determine who implied, that the interest or using is real property producing is later be conferred.

156 20.2036—1(c)(1)(i) Co., Lyon 435 U.S. at 581 n. 98 S.Ct. (emphasis § 26 C.F.R. (“The of a added). general 1291 characterization is also the official position This question tax is a IRS, purposes transaction for well as at least one position of the subject law novo review. [de ] Rul. of See Rev. circuit court. other (“[W]hen which the character particular facts from a decedent re 297 1979-1 C.B. subject.”). ization is to made are not so only a of the be an interest tained alternative, an or, deciding whether there was im in the When property, transferred some amount of inference plied agreement, the income portion of corresponding in a necessary. to make such an in is order the amount property, produced “all facts and circumstances sur inference in the estate is cludible use rounding subsequent the transfer and that would be transferred of the income.”); must be considered.” Es the retained necessary yield Comm’r, Uhl, tate 73 T.C. Rapelje 241 F.2d In re Estate see also Cir.1957). (1979); (7th accord Estate 1979 WL 870-71 (1st Comm’r, 408 F.3d Abraham earlier, way one a decedent As discussed Cir.2005); § see also 26 C.F.R. 20.2036-1. of a can retain is on the decedent’s estate “[T]he burden agreement. through implied an property is adverse disprove the existence 20.2036-1(c), however, 26 C.F.R. Under understanding an implied nonexistence of the existence or particularly ‘that onerous when burden is enough to resolve this agreement ” intrafamily arrangements are involved.’ agreement also case. The terms Maxwell, (quoting F.3d at 594 If, example, the facts were matter. 86). Rapelje, T.C. at Because implied an pursuant indicate partly used the Manhattan had retained 80% agreement, Decedent partly as a residence and as an income- present the substantial economic benefit property, rental we shall consid producing in Man 49% interest the transferred er whether the facts and circumstances then the “corre hattan surrounding either of these uses indicated of the value of the sponding proportion” so, if what the implied agreement, interest would be included entire 49% agreement terms of that were. the Estate. A. Residential Use Agreement Implied III. rely on turn to the Tax Court’s The Tax Court did not Dece-

We now in the Manhat- findings of fact. The Tax Court found that dent’s continued residence implied tan for its that an “implied agreement” there was an Stewart, the econom existed. See Estate “would retain Stewart inter at *2-*3 2006 Ct. ic benefits” of the entire transferred WL But Memo LEXIS at *5-*7. property.10 est the Manhattan Whether it in agreement, rely part. seems to on there was such Commissioner We, however, were, fact not that the terms questions what its terms are of do believe agreement can be read to that we for clear error. Estate of review of Maxwell, 594; enjoy- that Decedent would retain provide 3 F.3d at see also Frank case, stating a contract that Decedent applies §If 2036 in this it must be estate or 10. implied agreement there was an of because to receive the entire net in- would continue sort, undisputed that no for it is there was come from the Manhattan express agreement, a retained life such as

157 of ment the residential of Bran- life, during her prop- don’s 49% interest in the Manhattan thereby enjoyed the benefits of the erty. residential of his 49% interest and of rights his as a residential tenant in com- cases, In residential transfer “[i]n mon. determining implied agree whether an ment understanding existed between case, however, In this neither of parties.... the courts have found two the two factors in Spruill present. stated particularly factors to be significant: con Decedent did not possession have exclusive possession by tinued exclusive the donor of, nor did from, she exclude Brandon withholding possession and the of from the Brandon’s 49% interest in the Manhattan Comm’r, Spruill donee.” Estate v. 88 of property-—or, matter, for that the entire (1987); T.C. 1987 WL 49324 courts, property. Like other we draw a States, Guynn accord v. United 437 F.2d distinction between cases where a dece (4th Cir.1971). 1148, 1150 presence dent retains exclusive and with both those damning factors is so that in holds from the donee on the cases where a decedent transfers a resi hand, one and “those cases where a resi dential but continues to live in it jointly occupied dence by the donor and donee, to the exclusion of the the estate the donee has been held not includable in taxpayer every has lost in case of which we estate,” the donor’s Guynn, 437 F.2d taxpayer are aware because the could not 1150, on the other. This case is of the And, meet its burden.11 if Brandon had latter despite sort. And great burden not lived the Manhattan property for taxpayer faced cases, all these entire time between the transfer and taxpayers death, every have ivon in Decedent’s case of certainly we are aware have been clear error had when the Tax Court those two crucial fac found an that Decedent tors were favorable.12 In these cases a could have excluded Brandon from the transferor’s “use property by occu- See, Maxwell, 592, Comm’r, e.g., 409, 11. Estate 3 F.3d at Wier v. 17 T.C. 1951 595; Comm’r, (1951); Comm’r, Estate ReicharAt v. 114 T.C. WL 230 Estate Burr v. 4 144, 152-55, (2000); (CCH) 1054, 7065, 2000 WL 230358 Estate T.C.M. 1945 WL 1945 Tax Comm’r, 643, 648-49, 33, (1945). 57 T.C. Ct. Memo LEXIS at *36 One of Kerdolff (1972); 1972 WL 2464 Estate might Linderme v. attempt distinguish these on cases Comm’r, 305, 308-10, 52 T.C. 1969 WL ground 1616 many of them involved inter- (1969). The same result when the occurs spousal transfers. We are aware of two occupancy decedent’s prop of the transferred cases—Diehl and Roemer—involving Estate of erty is familial, "almost exclusive” of the donee. See non-interspousal transfers in which of Rapelje, Estate 73 T.C. at 86-88. family member co-occupied donee transferred decedent for the See, e.g., Union Nat'l Planters Bank v. Unit entire time between the transfer and the dece- States, 662, (6th Cir.1966); death; ed 361 F.2d dent's taxpayer and the won in both States, Binkley Roemer, moreover, v. United 358 F.2d these cases. In Estate 639, (3d Cir.1966) curiam); (per Diehl v. expressly rejected the Tax Court “spouses States, 1607, United only” 21 A.F.T.R.2d reading of the cases. See Estate of (W.D.Tenn.1967); Roemer, Stephenson v. United 1983 WL 1983 Tax Ct. Memo States, (W.D.Va.1965); F.Supp. (noting LEXIS at *9-10 the use Comm’r, Estate Roemer v. T.C. "family Memo 1983- relationship” words instead of “mari- (CCH) 1176, cases, 46 T.C.M. relationship” 1983 WL tal in this line of 1983 Tax Ct. Memo LEXIS holding logic at *6-*12 employed that “the -isnot limit- (1983); Comm’r, transfers”). merely Gutchess 46 T.C. ed interspousal We 554, 556-57, (1966); agree 1966 WL 1184 Estate with the Tax Court. a always carry the burden as alone will is a natural use the transfer after

pancy case, future a matter of law. some transferee^] [the] not diminish which does implied agreement an between finding of and and enjoyment of residential real co-occupants related family happy and congenial a out of grows clearly erroneous. might not be property Estate Gutchess relationship.” here, where, has as the Tax Court But Comm’r, 1966 WL 46 T.C. to en- findings relating specific made no (1966). portion of the joyment of the residential co-occupancy of a residential Although points the property, and Commissioner related donor and donee by the premises co-occupancy be- nothing besides the mere an of the absence of donee, highly probative the a conclu- tween the donor and repeatedly and has implied agreement con- sion based on burden, taxpayer’s cannot satisfy cerning portion the residential held to been result, As a Decedent’s residen- not hold that that fact stand.13 and do we need not which, 2036(a)(1) § when refers to “the points to several factors 13. dissent The of, claims, support the conclusion that Dece- to the income agreement implied from, had an property,” dent and Brandon a in the case of life enjoy possess estate, words, that Decedent property,” refer to the "the portion property. of Manhattan residential (and just property the transferred entire Court, however, any never made Wineman, The Tax But, remainder). Estate of given in implied finding that there was an to the effect common, tenancy of a in the same the case concerning portion, agreement the residential only interest. words refer to the transferred by factors cited the dissent let alone therefore, agreement, implied test Instead, the Tax support that conclusion. stringently applied should be no more on “Decedent’s retention of Court focused involving a fractional cases transfers of inter- property’s stream after income any case in- est in real estate than in other Stewart, 2006 WL Estate of was transferred.” volving any type “property.” And other *2, Ct. LEXIS at 2006 Tax Memo not, contrary do to the dis- those other cases 230, at *6. sent, 165-66, require post, at us to focus had intended to be Even if the Tax Court ignor- what retained while on the transferor implied agree- ever to find an the first court See, e.g., ing what the transferee received. co-occupants, the facts ment between related Gutchess, (noting 46 T.C. persuade the dissent would not referred withholding absence of "a of use from First, suggest a seems to us. the dissent stating the transferor’s transferee” partial a interest a decedent's as retention real “is a natural continued use of a is similar to retention of tenant in common ... transferee's] use which does not diminish estate, distinguish attempts to on that life possession”). involving ground com- the numerous cases Second, the dissent the facts referred plete fol- transfers of residential support held sufficient have not been post, See by co-occupancy. at 165-65 lowed implied agreement of an in other us, however, that it would & n. 1. It seems to initially that "Mar- cases. The dissent notes that a decedent who retains be bizarre to hold amicably got shared the and Brandon Stewart bears a heavier burden tenancy in common transfer, just property after their residential disproving the existence of an they Stewart was sole had when gives than does a decedent who Post, is, course, It true owner.” yet away simple in fee the entire using prevented from that Decedent was not despite having premises no remains on the prop- any part residential Moreover, legal right to be there. dissent transfer, erty had used before the nor she dispute, does not our conclusion consis- change But Wineman, a decedent’s was there other in her use. tent with Estate of involving estate, the absence of such in other cases real retention of a fractional See, estate, change, § was found. no 2036 retention a decedent’s retention of a life unlike Gutchess, e.g., at 554-55 triggering 46 T.C. automatically does not result is, (decedent spouse together and donee lived 2036 over the whole That property tial use of of the Manhattan file agreement terms of the were such that implied agreement does not indicate an Decedent enjoy the substantial eco- any that she would to extent retain the nomic benefit of 100% of Brandon’s 49% substantial economic benefits of the resi- interest the Manhattan property. This portion of dential Brandon’s 49% interest. is so because Brandon manifestly enjoyed, not, and Decedent did the benefits of the B. Commercial Use portion And, residential of the 49%. as we was, however, It clearly not errone below, discuss even as to the commercial ous for the Tax Court to find an implied portion it likely seems that Decedent re- enjoy Decedent would tained the benefits of less than the total life substantial economic benefit of 49%. part—indeed, perhaps some all—of the question is, The therefore, that remains portion

rental of the Manhattan Property. what part of the 49% interest should be (1) Tax Court found that “Decedent included the Estate. It is for the Tax $9,000 continued to receive the monthly the first instance to make the payments Solutions, rent from Financial findings necessary to answer that (2) question. Ltd.,” and testimony Brandon’s was not Because the Tax Court appears to have Stewart, credible. Estate 2006 WL 2036(a)(1) § treated as an all-or-nothing *2-*3, at 2006 Tax Ct. Memo matter and did not consider whether Dece LEXIS at *6-*7. Those two findings dent had “retained or reserved an clearly are not erroneous and must be respect to a part only of upheld. Because the Estate has failed to transferred,” C.F.R. provide explanation credible why as to 20.2036—1(c)(1)(i), findings payments entire rent went cited to Dece the Tax dent, they Court—Decedent’s support receipt the Tax finding Court’s rental income and the implied agreement. credibility determi nation as to Brandon’s testimony—do not Apportionment C. provide a complete picture of the extent to above, For the reasons stated enjoyed was not Decedent the substantial clearly erroneous for Court to economic find benefit of Brandon’s 49% inter an implied agreement, but it was clearly during And, est her life. because the Tax erroneous for the Tax Court to find that Court did not consider “all facts cir- years residence for about 17 before transfer stantial Manhattan thereafter). years Post, and about 11 Secondly, expenses after the transfer. at 168-70. points dissent to the credibility Tax Court's As noted opinion, in Part III.C of this substan- Post, finding. at 168. Yet all the Tax Court tial economic benefit is best determined income, "testimony relating found was that Brandon’s by gross net rather than income or agreement” event, an oral to offset expenses. a decedent’s expenses payment income and with East substantially of all or all ex- Hampton property has, expenses penses cases, income and post-transfer "was many Stewart, not credible.” Estate 2006 WL resulted in a implied agreement. of an *2-*7, See, Roemer, 2006 Tax Ct. e.g., Memo LEXIS 1983 WL 230, at *7. It does not follow from the ab- (noting Tax Ct. Memo at *4 LEXIS offsetting agreement, sence of an post-transfer, or from the paid the decedent the mainte- nance, incredibility insurance, testimony, of that utility there was bills for the resi- dence, that Decedent would grocery well as some bills and taxes);

retain of the residential Stephenson, F.Supp. ("Decedent property. Finally, the Manhattan the dissent pay continued to the bills and payment house....”). relies on the Decedent's of a sub- to maintain the how portion of the interest and and residential surrounding the transfer cumstances to the commercial much is attributable property,” the use of subsequent of 86, finding be- appropriate it Such a is essential portion. at is T.C. Rapelje, 73 cause, gross income is that the at least insofar so and remand vacate concerned, Decedent received 100% of may do so. por- the commercial benefit from economic apportionment determining In transferred, by receiving tion of the 49% interest, the Tax Court 49% Brandon’s Brandon received payments, the rent while by the adopted approach should use from the the economic benefit 100% of ruling, a In that Rui. 79-109. in Rev. IRS of that 49% inhabit- portion residential children a to his adult conveyed decedent it. ing home, for his life he retained but vacation alternative, or, in to use then examine The Tax Court should during the payments, keep the rental made, seemingly that it but finding factual January year. each The Service month of fully into account. Between failed to take includible in “the amount that explained and Dece- of the 49% interest the transfer portion estate is death, Manhattan paid Decedent dent’s neces- that would be property transferred $21,790.85,14 and expenses of property income.” Id. the retained sary yield ex- paid property Manhattan Brandon property of the for Janu- The rental value Stewart, $1,963. penses $600, was 13.3% of the ary was 3018173, *1, 2006 Tax Memo at Ct. WL annually, and produced property $4500 a dou- finding at *3. This is LEXIS calculated 13.3% therefore the Service Payment expenses ble-edged sword. the residence was to be value of of the property to a is one attributable gross estate. included in the decedent’s ownership of that indicia of Id. (but all) of the paid most Decedent to Brandon’s 49% expenses attributable complicated are more The facts result, the Tax As a Court’s interest. case, principle the basic the instant but concerning expenses supports its finding portion same: that an existed finding por is the in the be included a significant the inclusion of and hence necessary produce tion that would be in the of the 49% interest Estate. retained. The Tax the income Decedent much But each dollar of how Court must first determine by Decedent also decreases expenses paid generated benefit the substantial economic received. For benefit she is attributable to the economic by the 49% interest that date indicates such a bank statement for in addition to 14. The Estate claims $21,790.85 parties also payment. J.A. 195. The expenses found the Tax Court paid stipulated Decedent had estate taxes paid, paid real Decedent to have Decedent property with a check writ- Property for the Manhattan the Manhattan estate taxes on $9,801.78 July J.A. Appel- or about 2000. ten on on November statement shows that such happens to Decedent’s bank at That number also lant's Br. made, payment in the amount of was between the sum of be the exact difference amount, $9,665.58. 155. That un- paid, J.A. expenses Appellants claim Decedent alleged payment November that she like the the Tax Court found amount $9,801.78, in the Tax Court’s was included paid. Appellant’s Br. at 13-15. But the See amount of Manhattan of the total claim in the calculation only support for the Estate's paid by On this property expenses Decedent. supposed to that is be record is that number record, say that the Tax Court’s we cannot estate tax of it is found in Decedent’s $21,790.85 clearly erroneous. Nothing in Decedent's return. J.A. 104. issue,” Br. jointly Appellee’s if A B own a rental example, we $10,000 generates per go cases, month need not that far. some $5,000 expenses, month in per rent and property may consideration of other be B evenly A B the rent but split and and to an useful accurate determination of who A expenses, all the then substance pays enjoyed the substantial economic benefit of the entire economic benefit of getting If, example, Brandon and getting nothing. while B is split Decedent formally had the rental in- “ ‘enjoyment’ ... sub- connote[s] Because come and of Manhattan property costs benefit,” present Byrum, economic stantial but had 51%-49% Brandon allowed Dece- (internal U.S. at 92 S.Ct. to take portion dent of what should have omitted), think marks we who quotation Brandon’s been net income the East what be paid expenses must taken into Hampton property, eq- amount in apportioning the 49% interest account ualed the income Brandon was entitled to Brandon. the Estate and oth- between from his 49% share Manhattan words, the Tax must determine er Court property, then of consideration the East of in- portion received what the net who Hampton property necessary would be interest, from the 49% rather than come prevent abusive transaction that would gross income.15 evade At otherwise 2036. the other ex- treme, if Finally, apparently joint- the Tax Brandon and did Decedent ly consider owned properties not the distribution the income hundreds of other expenses Hampton particular from the East there was no reason to think at all. Tax While the Court was that the income distribution of from those clearly obligation way under no credit Bran- properties was related to the testimony that and Decedent in- don’s he substantial economic benefit of the disput- Hampton property, tended to use the East income to ed then be it would incorrect to off set the Manhattan income and then consider such properties. other We leave end, year’s determine, their reconcile accounts it the Tax Court to on re- mand, considering be worth on may remand where this falls along case where the net income from the East spectrum and whether distribution of Hampton property Although Hampton went. net income from East prop- argues erty that the reference is among Commissioner the “facts and circumstances 2036(a)(1) property” § surrounding “the “does not subsequent the transfer and provide property,” for consideration use of the of which decedent’s all “must be considered,” relationship to other property, regardless Rapelje, 73 T.C. at its circumstantial association with the 86.16 sentence, preceding 15. As used in the If "in- the Tax Court does decide to consider the distribution of net income from the generated includes East come” the dollars Hampton property, necessary it will be then portion the rental interest in 49% findings to make of fact as to the amount and (less, Manhattan the case of distribution of income the rental and ex- income, expenses net attributable to the and, that, penses property, from that on interest), imputed but also Brandon's proof. Estate bears the See burden living income from in the residential Maxwell, 3 F.3d at 594. is, property—that the fair market rental We depending also note on the paid value one would have to be Decedent’s amount and distribution of the net income 9,May housemate from to November Hampton from the East consider- 27, 2000. might ation turn out to be information to the Estate. Estate’s brief unfavorable 49%, so that its value should be of this Conclusion IV. It would included in her estate. finding that the Court’s Because majority to have have been difficult for the between terms of the done otherwise. The burden rested that De provided and Brandon Decedent disprove Stewart’s estate to the substantial enjoy 100% of cedent would agreement, yet existence such 49% undi of Brandon’s economic benefit tended, instead, undisputed facts in the vided interest Thus, it. after the transfer of the show erroneous, judg vacate the clearly we share, to Margot Stewart continued pro remand for further ment below and in live the first two floors “retained or reserved ceedings. Decedent Brandon, just with her son as she only respect ... with an interest transfer, Despite the she alone before. 20.2036—1(c)(1)(i), § Bran of,” 26 C.F.R. paid to receive the rental income continued proper in the Manhattan don’s 49% stake by upper the tenants who leased the three transferred. On ty, is what she per floors for month. And notwith- $9000 remand, should make the the Tax Court standing formally that Brandon Stewart necessary to deter factual determinations brownstone, it owned 49% of the was Mar- net income from mine the amount of the pay who continued to essen- got Stewart enjoyed by Dece Brandon’s 49% tially expenses all with the associated the Tax Court can calculate dent. Then $21,000 in the property—over Manhattan of “the val “corresponding proportion” death, period compared before her and include it property,” ue of the entire the nominal amount of contributed $1963 § estate under the Decedent’s by Brandon. 20.2036-1(c)(1)(i). 26 C.F.R. See judgment sure, therefore VACATE offered We To be Brandon Stewart credited, REMAND this case for further testimony below and if would have viti- opinion. with this proceedings consistent tendency undisputed ated the of these Margot re- facts to show Stewart LIVINGSTON, Judge, Circuit enjoyment of the tained dissenting: property during her lifetime. He swore agree- Tax that and his mother had an oral majority concedes that he expenses case that ment which the income and properly Court concluded this to be existed between the from the Manhattan were decedent, Stewart, expenses and her adult reconciled with the income and son, Brandon, Hampton property associated with an East despite transfer credited, five-story they jointly owned. If this testi- a 49% share during mony her life- would have established Brandon brownstone to Brandon time, was to receive the rental income posses- Stewart would retain Stewart at with his 49% share and was sion or least some associated suggesting Hampton property at the same time contains a chart that consideration East property into Hampton property yield a as it takes the income from that of the East expenses roughly equal Hampton If East were overall distribution between account. large disproportionately paid net income and were Brandon and Decedent of the Brandon, then of the East properties. Appellant’s Br. at 13- consideration from both inaccurate, chart, however, Hampton property by might the Tax Court not 15. This not having gone alleged net income only real estate result in more because it includes supra payment by Brandon than if the Tax Court looked tax Decedent noted note ignores expenses the Manhattan but also because it pay 49% of the expenses. very brownstone’s stance of the transfer under consider- accountant, however, Brandon Stewart’s ation. being

could not recall informed of such an This turns the proper—and longstand- arrangement. The Tax Court concluded ing—construction of section 2036 on its testimony, that Brandon simply Stewart’s head. It opens up also a loophole that will put, majority “was credible.” The vitiate to a degree considerable the effica- takes no issue with this conclusion. cy section, conjunction with the fact, takes no issue with uniform rate applicable schedule now any of this. It nevertheless vacates taxes, gift estate and in ensuring that the decision of the Tax Court full including the gift estate and equitably taxes are imposed value of the Manhattan townhouse subject on all those to them. I respectful- gross value of Margot Stewart’s estate on ly dissent. theory though that even an implied existed, the Tax clearly provides, Section 2036 concluding part, erred that relevant its terms were such that follows: posses- Stewart retained enjoyment sion or of the entire 49% inter- The value of the estate shall in- formally est she had transferred—mean- clude the value of all property to the ing, the income stream from the any extent of interest therein of which rent that paid, but also the substantial the decedent has at time made a economic benefits of residence. The ma- (except transfer in case of a bona fide

jority does not—and cannot—explain how sale for an adequate full consider- clearly the Tax Court erred as a factual ation in money money’s worth), or ... matter in concluding Margot Stewart under which he has retained for his life benefits, retained all given these that her relationship to property changed the in not (1) the possession or of ... significant one respect from period the the property.... preceding transfer to period after. In- 2036(a). 26 U.S.C. As the foregoing stead, majority, misreading body clear, makes the focus of section 2036 is case law that primarily involves transfers upon whether a by transferor—whether family of 100% of a member’s interest in a express implied agreement—in sub family member, to another con- stance has retained the possession or en post-transfer cludes that co-occupancy is joyment following a transfer. near-conclusive evidence that the transfer- Church, See Comm’r v. Estate 335 U.S. longer or can no enjoy the substantial 632, 644, 322, (1949) 69 S.Ct. 93 L.Ed. 288 economic benefits of residence to the ex- (noting, interpreting predecessor Indeed, tent of the transferred interest. 2036, statute to section that “we look to majority finds such co-occupancy dis- substance, not to positive here, form” in determining even where the transfer con- only a effect of a (quoting cerned fraction transaction Helvering of the transferor’s interest, Hallock, 106, 114, v. tenancy 444, created a 309 U.S. common that 60 S.Ct. guaranteed (1940))); 84 the transferor L.Ed. 604 Thompson continued ac- Estate of Comm’r, (3d 367, cess to the entirety of her 382 F.3d 375-76 Cir. 2004) involved a (applying transferor and transferee who same principle to transac majority agrees 2036); cotrectly were found tions under section Glaser v. Unit by States, (7th Cir.1962) a court of 57, law to have reached an ed 306 F.2d 61 (same). agreement undercutting notes, the economic sub- As the majority pur- 164 (2d Cir.1999) Ltd., 190 F.3d 67-68 that tax is to ensure this section

pose of 470 City, v. Bessemer (quoting tax via inter Anderson the estate cannot avoid payers L.Ed.2d that are essen 105 S.Ct. 84 U.S. vivos transfers (1985)). re testamentary, may with the transferor fact that there tially “[T]he support an inference taining have been evidence Thompson, 382 lifetime. See the trial court” contrary to that drawn (“Section error, 2036 addresses F.3d to demonstrate clear is insufficient vivos transfers often inter Enters., LLC, concern F.3d v. Motiva Ceraso (citing will substitutes....” function as (2d Cir.2003), as is a conclusion Grace, 395 U.S. v. Estate States United have reviewing court it would L.Ed.2d 332 89 S.Ct. determination had reached different (1969))). that a de An evidence as a trier of considering been in her cedent will continue fact, 190 F.3d at 67. Shipping, Mobil a transfer is property after enjoyment of in the Tax Court’s clear error all the facts and properly inferred from re Stewart determination surrounding the transfer circumstances enjoyment of the full tained use, Estate subsequent property’s and the with Brandon as ten residence she shared Comm’r, 82, 86, 1979 73 T.C. Rapelje common, majority errs in at ant in (1979); Abra accord Estate WL 3799 First, respects. two least (1st Comm’r, 26, 39 Cir. ham v. 408 F.3d very argu cases on which its misreads enforceable, 2005), legally need not be and depends. majority principally ment Comm’r, v. 3 F.3d Estate Maxwell heavily cases in which a trans upon relies (2d Cir.1993) (citing Rapelje, 593 conveyed 100% of his or her feror has 86). Moreover, at least where 73 T.C. at family in a to another property interest suggest the surrounding the circumstances member, typically spouse, but then most implied agreement existence of at the has continued to reside the trigger section burden until with the transferee the transferor’s disprove “to the exis falls to the estate circumstances, I agreement agree In such any tence of death. adverse Maxwell, 3 F.3d that the understanding,” Estate that courts have often reasoned by a burden that this Court has occu decedent’s “use of the in the “particularly described as onerous” a natural use pancy after the transfer is transfers, intrafamily id. at 594 context of grows congenial ... which out of a 86). T.C. at (quoting Rapelje, 73 family relationship,” Estate happy Comm’r, 1966 Gutchess T.C. foregoing suggests, and as the As the (1966), and have concluded as WL 1184 majority acknowledges, the Court’s that the transferor’s continued resi result im- regarding in this case the conclusions alone sufficient evidence dence is not agreement between plied itself agreement which to infer an that the factual determina- Brandon are Stewart or en possession transferor would retain clear error. tions reviewable for See by joyment, contemplated section A factual determination is id. at 594. see, Nat’l Bank v. e.g., Union Planters “only ‘although if there clearly erroneous (6th States, F.2d Cir. it, United reviewing support the is evidence 1966) the tax (finding impose no basis “to evidence is left with the court on the entire who has the of a husband upon and firm conviction that mistake definite ” family to the simple vested the fee title Shipping Mobil & has been committed.’ wife, merely because he residence his Transp. Liquid Carriers Co. Wonsild Next, until to live in the house his focuses not on what continues retained added)); Stewart after the transfer (emphasis death” townhouse, the 49% share (CCH) but Roemer, 46 T.C.M. rather on what Brandon suppos Stewart (1983) cases, observing that (citing edly This received. contravenes the plain uniformly rejected have “the courts language of section which directs of section applicability advocation 2036’s gross of a value estate shall in donor on mere fact based of all property clude “the value ... of to live in a he continued residence ” which the decedent has at time amade added)). conveyed.... (emphasis transfer ... under which he has retained such in- considering But whereas courts life ... enjoy his ” property.... ment of ... trafamily on the In other transfers have relied words, section under 2036 we look to post-transfer between co-oc- compatibility whether the facts and circumstances sur and the fide cupancy existence of a bona rounding a transfer evince an to conclude that a transferor’s transfer lifetime transferor’s at a is insuf- continued residence enjoyment of the affected property will not evidence, itself, by ficient confirm diminished, do, they be and if we include of an favor- existence the value of the transferred transferor, Boris I. ing the see also 1 reading estate. This of the statute Lokken, & Lawrence Tax- Bittker Federal reference confirmed to the statute’s Income, Gifts ation Estates original target, creation the dece ¶ (2009), conversely, the majority, 126.6.2 dent of a life estate with a given remainder co-occupancy post-transfer as suffi- treats circumstances, such relatives. prove of an cient evidence the absence the full statute includes value of prop respect implied agreement, at least with erty in the decedent’s estate because portion of the residential his lifetime of the property is (observ- issue, Maj. atOp. see 159 because, undiminished—not after in cases ing that where the transferor transfer, enjoys he somehow the remain exclusively possessed neither a der to given his relatives. The transferee, “taxpayers nor excluded interpretation Tax Court’s of section 2036 case,” in every concluding, have won involving in partial cases transfers of real else, basis of “Bran- nothing on the that estate—where distinction under dis manifestly enjoyed, don did decedent cussion is most relevant—is consistent not, portion benefits of the residential with understanding of the statute. 49%.”); Maj. of Op. (indicating at 160 Comm’r, See Estate Wineman v. 79 of (CCH) 2189, that “Brandon the eco- (2000); received 100% of T.C.M. 2193-94 Es Comm’r, (CCH) portion from the nomic benefit residential tate Powell v. 63 T.C.M. it”). (1992). by inhabiting 3193-94 [of interest] his logic not that departs This just highlighted The distinction signif- cases, prior ignores but that the Tax icant, because neither the formal interest here was “all required to consider that Brandon Stewart received as a tenant surrounding facts and circumstances (purported) in common his nor substantial and subsequent prop- transfer use of the can, enjoyment of that interest as the ma- erty” determining in or ab- it, existence jority dispositive would have be toas implied an agreement. sence of Estate possession or enjoyment Stewart’s Rapelje, 73 T.C. at 86. the residential the Manhattan common, it, jority dispositive would seem have a tenant in to As

property. even after not right, retained the a conclusion a transferor did con- Stewart transfer, enjoy the whole of possess entirety or possess enjoy tinue to a townhouse, subject only to the Manhattan to do the same. right Brandon Stewart’s Wineman, relatively Estate one of the Jemzura,

See, 36 N.Y.2d e.g., Jemzura in few cases which courts have considered 330 N.E.2d N.Y.S.2d the estate tax of a fractional consequences (1975).1 wholly for possible It was thus resulting tenancy real estate transfer substantially pos- the same her to retain common, supports this conclusion. See or session (CCH) 79 T.C.M. at 2193-94. The court in sole This is not as the owner. she had that case found that no tenancy ought in common to be say that a existed between the and her chil- decedent itself, viewed, evidence of as sufficient regarding dren her transfer of a 24% in- agreement or of the terms of homestead, family terest in the and thus tenancy A in common agreement. such an that the 24% was included properly specifically, generally, co-occupancy estate, though even decedent might inconsistent with the transferor’s be continued to live with her children at proper- full the homestead after transfer. Id. at 2194. tenancy ty, whether because the interferes court, however, emphatically did not subsequent desire with the transferor’s rely tenancy on the mere fact of a sell the because the transferee common, coupled co-occupancy among partition, can file himself action members, family to determine simply because co-tenants’ desires for proper- children’s fractional was not day-to-day use of an asset like a share home ly included incompatible. generally are See decedent’s estate. (CCH) Powell, It instead looked at “all facts and circum- 63 T.C.M. 3193-3. But tenancy can the fact of a in stances surrounding neither mere the transfer and sub- be, as the co-occupancy sequent common with ma- use of the Id. at property,” 2036(a) Although husband.”); rights Spruill does U.S.C. not re of her Comm'r, 1197, 1226-27, quire legally retain a en 88 T.C. transferor 1987 WL (1987) ("While possess enjoy property forceable transferee and [the his following may transfer for a court to find have wife] [the in order assumed that transferor] that an to that effect exist would continue the house to live in after ed, Maxwell, died, see Estate 3 F.3d at assump- [transferor’s wife] ... such an of noting considering implied worth that courts co-occu tion does not rise the level of an to following pancy transfers—the that had retained 100% cases decedent the upon heavily 'possess enjoy' which the relies— so to or the homesite. On any contrary, continuing have considered the lack of the that [the transferee] testified had right by prop get the the along transferor] transferor to remain on not able to [the been wife, erty significant to be in the absence with the [the of transferee’s transferor] See, leave.”). implied agreement. e.g., Plant have had to Union Unlike the trans- Bank, interest, (noting Nat'l ers 361 F.2d at 665 feror of a the transferor of a any ... partial tenancy [the "at time could a transferee] have interest that results in in conveyed property] by sep rights [the residence her common does retain substantial with deed, respect property, arate without of the and [the the consent trans to affected those feror]”); States, extend, indicated, Stephenson rights just enjoyment v. United 238 as ("It (W.D.Va.1965) F.Supp. hardly property. seems of zarre,” entire It is thus "bi- Virginia Maj. Op. clear in deed carefully under the 1955 at n. 158-59 her, tenancy ownership analyze [the of the transfers in a transferee’s] house that result in absolute, legal any was free and clear of common where 2036 is concerned. section see, precedent requires, building”). Margot Given Stewart’s longstanding re- as Abraham, ceipt at of 100% of rent on the paid property, Estate 408 F.3d e.g., of Comm’r, Hendry Estate see T.C. of showed that The facts of the case (1974) (noting the actual “re- use of post-transfer large decedent’s tention of income revenue or from the contained, inter parcel issue—which ... the decedent constitutes alia, residences, barns, large two two very clear evidence” of existence of an barn, granary, shop, a farm cattle small implied agreement.); accord Estate of corrals, scales, and an or- garages, two Comm’r, McNichol v. 265 F.2d home, her own chard—was limited to (3d Cir.1959), here the estate needed to next to garden, and the small orchard her point some facts or circumstances to Wineman, home. Estate 79 T.C.M. of carry “particularly its onerous” burden of (CCH) so, the court at 2194. Even noted showing the absence agree- of personally that “the fact that decedent respect Margot ment with Stewart’s than property [after used less all of the or whole. See does not demonstrate she transfer] Maxwell, 3 F.3d 594. But the possess enjoy prop- not the entire did showing made no whatsoever that Nor, even, erty.” Id. was the fact that Margot Stewart’s use the residential paid other than someone decedent tax- portion changed appreci- the townhouse on the on own es sufficient its to ably many years between the when Bran- of an implied demonstrate the absence lived with Margot houseguest don Rather, it agreement. Id. was after life, final months of her when surrounding and other circumstances these possessed Brandon formal interest together the court were considered willing to conclude that the estate was Moreover, the Tax Court made other proving carried its burden of the absence findings strongly supported fact that its an implied agreement. Notably, conclusion that Stewart retained “heavily” relied the credible testi- court on mony of one of the transferees that there following her formal of an transfer understanding no between the dece- already mentioned, to Brandon. As Mar- and her children. Id. dent got Stewart received 100% the income present case, In the nothing there is from the rental of the Manhattan the record to indicate that Stew- significance ma- use art’s of the Manhattan residence after jority attempts by dividing to minimize transfer was the fashion limited into its rental residential Wineman, the decedent’s components, suggesting that the Tax presence way that Brandon’s inter- making separate erred find- Margot’s possession enjoy- fered ings adequate to a conclusion that support fact, In ment of the the estate extent implied agreement the of the cov- Margot that and Brandon concedes Stew- majority the But as the ered residence. amicably proper- art shared the residential determining acknowledges, scope the of an transfer, just they after the ty had implied agreement far from an exact science, was sole when Stewart owner. per- and the Tax here was Court (indicating Petitioner’s Br. at 9 that See mitted to inferences in draw some deter- transfer, Margot mining agreement’s parameters. Maj. after the “Brandon and the together amicably Op. majority lived as tenants com- at 156. The does not indicate mon, portion why the Tax not drawn sharing the residential of the Court could have child, cohabitating parent the reserved to a Margot and about how inference

strong relationship for himself its their viewed Brandon Stewart permitted Manhattan not be of the that the estate should so the residential to way they acted with tax on the payment avoid the of estate from to income, rental property’s to the value as whole. respect property’s that estate’s contention which belied considering all the facts Properly had been tenancy common fide bona circumstances, placing the burden Thompson, 382 created. See abundantly it is clear belongs, where it (“An may implied at 376 F.3d not err here the Tax Court did circumstances sur- inferred from be the estate. Brandon Stew- holding against subsequent transfer and rounding both satisfy the estate’s burden art’s efforts property.”). use of the of the rental disproving significance majority’s fact, significance he testimony trial receipts—via prior case to be found assertion—not that he had received none of explained required Tax was law—that he and Manhattan rent because com- findings regarding the separate make to offset the costs and agreed Stewart had portions and residential mercial revenues of the Manhattan cannot overstated. be with their East against those associated way, in this By subdividing lack of cred- Hampton property—failed Margot Stew- majority first renders Rosenberg, ibility. See Amalfitano income—or receipt of the rental art’s Cir.2008) (“In (2d reviewing F.3d property’s regarding other evidence error, are not allowed findings for clear we portion—irrelevant “commercial” so-called second-guess either the trial court’s whether she retained to the determination its choice be- credibility assessments or the “residen- inferences.”). competing permissible tween majority in effect shifts tial” The portion. credibility find- adverse Court’s of an proving the existence the burden moreover, by the incon- supported ing, to the residential agreement as testimony and sistency Brandon’s between by depriving portion to Commissioner accountant, his who indicated natural inferences flow him of the having Brandon ever he could not recall circumstances sur- the facts and all Krieger See plan. him told of the offset single this transfer—a transac- rounding Prods., F.2d Bldg. Bond Gold admits included tion which (2d Cir.1988) (“[Wjhen judge’s a trial favoring Margot Stew- on his decision to credit finding is based im- majority next makes near art. The wit- testimony of one of two or more to meet his possible for the Commissioner nesses, told a coherent each of whom has claim, astounding with the new burden not con- facially story that is plausible merely that a relying saying on cases evidence, that find- tradicted extrinsic prop- at a continued residence transferor’s inconsistent, vir- internally if can ing, is not alone sufficient erty after transfer error.”) (quoting be clear tually never that such resi- implied agreement, infer an 1504). Anderson, 575, 105 470 U.S. at S.Ct. of the absence highly probative dence “is findings if factual were Even additional Maj. Op. at implied agreement”! of an the Tax Court’s con- required support it hard to con- analysis 158. This makes respect to the residential clusions with Tax a situation in which the Court ceive of dispute—(cid:127) I property—which of the the formal might despite find that properly As the findings. Tax made such in the property transfer of a fractional interest 169 noted, support after transfer not the assertion that a tax Margot’s court Tax Court Brandon, precluded finding is undivided interest to that the trans of a 49% possession the pay enjoyment to the bulk of ex- feror retained or of continued she property, the a relating entirety to the Manhattan of when the trans penses $21,790.85 only contributing gestures showing in 2007 Bran- feree made token while Stewart, substance, only 92 that had Estate the transfer paid don where $1963. of (CCH) (2006). major- changes The minor occurred in 358 the trans T.C.M. indicates, hand, Bran- possession enjoyment. on the one feror’s ity See Es reim- 382 payment Thompson, (uphold don’s of this sum without tate F.3d at 376 of change[ in “significant ing was a inclusion of interest in gross ]” bursement relationship “practical his and Stewart’s to where the effect of ... changes Maj. Op. implying [imposed at the during the transfer] dece minimal”); supports that it the conclusion that Bran- dent’s life was Estate cf. Grace, (find at post-transfer relationship 89 don’s U.S. S.Ct. 1730 that of At in part-owner. ing property was held in trust includable time, majority suggests same estate under 26 U.S.C. 2038 when Margot’s payment reciprocal of more than her share arrangement trust “leaves property’s expenses of the decreased her settlors in approximately the same eco proper- position they net of the nomic as in would have been Maj. Op. surely, at Bran- ty. they 160. But created trusts naming themselves beneficiaries”); of far payment of Wineman, don’s less than his share of as life (CCH) as bit expenses tenant common—a over 79 T.C.M. at 2194 (noting that even expenses, total was payment 8% of the when he of all taxes someone property—supports 49% owner other than transferor is insufficient conclusion that the transfer show of an implied agreement Court’s absence giv substance, one of ing was not transferor whole). to fulfill respon- continued the bulk of the Viewed in entirety, its of ownership, notwithstanding history Margot sibilities and Brandon Stewart’s formal law Brandon’s interest.2 does relationship Case Manhattan property, majority legal phenson, F.Supp. if its indicates that even at or the existence analysis significance Stew- of Brandon offsetting evidence in favor of the estate flawed, art’s nominal contributions his fail- result, significant to the see Estate of obligations tenancy ure fulfill the Roemer, (CCH) (observing at 46 T.C.M. suggestive sufficiently still common are not clearly in the “[t]he evidence record demon- Maj. agreement favoring Margot. Op. at change strates the in the decedent's state (observing pay- 159 n. 13 that "a decedent’s regarding giving mind the residence after it to expenses substantially all or ment of all noting daughter,” and that after the trans- has, cases, post-transfer many resulted fer, daughter the decedent had referred to her implied agreement” (citing in a of an "landlord,” requested permission as her be- Roemer, 1177; (CCH) T.C.M. residence, inviting friends fore to the 663)). Stephenson, F.Supp. But expressed being a fear excluded and sent dispute does not the Tax Court's home); nursing (noting daughter's] id. "[the finding that an did exist following gifting actions of the residence respect to the at issue she, changed,” pointing also to the fact that case, majority’s citation to cases in transferee, payments had made substantive which courts have declined to accord much ownership, crediting reflective of weight post-transfer pay- to the decedent’s daughter’s testimony that "if there had ever expenses ment of fails to note either rela- falling out ... support [the been a evidentiary decedent] tive of other absence cases, moved”). see one to have in those Ste- have been the majority reopens loop- a objec- inexplicably significant, lack of especially and has, in unmistak- relationship, strongly legislature hole that the in that changes tive terms, conclusion commanded shut. long the Tax Court’s able since supports essence, remained, in Brandon Stewart demonstrating the existence of Evidence fortiori, A houseguest. Margot Stewart’s tenancy in common genuine post-transfer a a “definite and support does not the record conclu- certainly weigh against could been that a mistake has firm conviction ” had that the transferor and transferee sion in this case. by the committed’ agreement that the transferor implied an 190 F.3d at 67-68. Shipping, Mobil enjoy possess would continue to purports stop short a But since in case whole of this law, post- a matter of holding as only an absence of such evi- there is not transferor co-occupancy transfer dence, actually but the record shows always preclude a find- transferee will parties to the transfer did not behave in favor ing of a in though tenancy as common been in present But the facts given transferor. relationship created and the transferor’s imagine any evi- case, it is hard to substance, not, change, in did trial of an admission at dence—short I cannot see how it was clear error for the the estate'—'that would be sufficient that the estate failed to Tax Court to find an implied the existence of demonstrate carry disprove its burden to the existence regarding co-occupied a resi- agreement agreement favoring all The transferor’s retention- of dence. com- regard transferor with to both the commercial rent from the aspects mercial and of this residential irrelevant very same is deemed majority’s Manhattan townhouse. The a tax a matter of law to the conclusions reasoning, by focusing solely on Brandon may regarding property’s draw court Stewart’s residence at the townhouse as portion, notwithstanding the residential only dispositive, tenant common as obligation to consider all circum- court’s and contra- departs prior case law surrounding as- stances 2036, but also venes the text of section intentions. sessing. parties’ And statute, thoroughly undermines the invit- post-transfer partic- transferee’s minimal disparities among those ing inequitable obligations tenancy in the of a ipation subject gift to the estate and taxes due to held, strangely again as a common is easy dodges by future tax avoiders. law, establishing matter of both to aid the existence of an adverse I respectfully dissent. to undercut the economic value for estate that which was retained. purposes tax majority’s opinion imposes any

If bur- estate, much less the proof

den of on the I requires, one that precedent

onerous Cohabitating family it. mem-

cannot see engage

bers are all but invited to sham impact upon

transactions that no have

transferor’s tax purpose and whose Court, job It

avoidance. is not the of this course, Congress loopholes to close Here, however,

has left in the tax code.

Case Details

Case Name: Estate of Stewart v. Commissioner

Court Name: Court of Appeals for the Second Circuit

Date Published: Aug 9, 2010

Citation: 617 F.3d 148

Docket Number: 07-5370-ag

Court Abbreviation: 2d Cir.