April 05, 2019

Ten Essential Tax Rulings for Estate Planners


In the September/October 2009 issue of Probate & Property, the authors ran a flyer requesting that readers visit the ABA’s website to vote for the ten tax rulings that are essential to estate planners. Every estate planner should have a working knowledge of these ten rulings.

Crummey v. Commissioner. The Crummey case, 397 F.2d 82 (9th Cir. 1968), involves IRC § 2503(b), which provides that the allowable gift tax annual exclusion applies only to gifts in which the donee has a “present interest,” as opposed to a “future interest.” The issue was whether certain gifts to an irrevocable trust constituted a present interest that would allow the gifts to qualify for the annual gift tax exclusion. The court held that, rather than the existence of a present interest in the property turning on the beneficiaries’ actual enjoyment of the property, the determination should rest on their right to enjoy the property. The Crummey case has come to stand for the principle that a beneficiary’s right to withdraw assets gifted to a trust for a limited period of time creates a present interest in such assets that qualifies the gift for the gift tax annual exclusion.

Rev. Rul. 85-13. The facts of Rev. Rul. 85-13, 1985-1 C.B. 184, are in substance identical to the facts in Rothstein v. United States, 735 F.2d 704 (2d Cir. 1984). The IRS in Rev. Rul. 85-13, like the court in Rothstein, concluded that the trust was a grantor trust. What is the effect of this? In Rothstein, the Second Circuit held that the effect of the trust’s being a grantor trust is that the grantor trust is a separate taxpayer. In Rev. Rul. 85-13, the IRS held that because the trust is a grantor trust, the taxpayer is deemed to own the trust assets, and, as a result, transactions between the grantor and the grantor trust are not recognized as a sale for income tax purposes. The IRS noted the Second Circuit’s contrary decision in Rothstein and concluded by stating it will not follow Rothstein on this issue.

Commissioner v. Estate of Bosch. At issue in Commissioner v. Estate of Bosch, 387 U.S. 456 (1967), was whether a federal court or agency in a federal estate tax controversy was bound by a state trial court’s determination of property rights, specifically in a case in which the United States was not made a party to the proceeding. The Court ruled that federal authorities are not bound by such a determination. From a practical standpoint, the Bosch decision allows federal authorities to act as a sitting state court. An estate planner would be well advised to find a ruling by the relevant state’s highest court before making a decision on any issue affecting federal tax.

Bongard v. Commissioner. The IRS has launched numerous attacks on family limited partnerships (FLPs). One argument made by the IRS is that IRC § 2036(a)(1) applies to the creation and funding of an FLP. The test used by the Tax Court in Bongard v. Commissioner, 124 T.C. No. 8 (2005), appears to be the test most often cited in court decisions. The court held that the exception to IRC § 2036(a) is satisfied if (1) there is a legitimate and significant nontax reason for the creation and funding of the entity and (2) the interests received in exchange are proportionate to the value of the property contributed to the entity.

Walton v. Commissioner. Before Walton v. Commissioner, 115 T.C. 589 (2000), a large transfer to a grantor retained annuity trust (GRAT) often resulted in a substantial taxable gift. In Walton, taking a position contrary to Example 5 of Treas. Reg. § 25.2702-3(e), Walton transferred $100 million worth of stock to two GRATs, each of which had a two-year term with annuity payments continuing to her estate if she died during the term of the GRATs. The taxpayer’s gift tax return reflected no taxable gift, and the IRS argued that the gift was over $3.8 million. The Tax Court agreed with the taxpayer and rejected Example 5 as an unreasonable and invalid interpretation and extension of IRC § 2702. The Treasury has issued Regulations that now make clear that continuing the annuity payments to the settlor’s estate can reduce the gift tax value of the transfer. This decision (and the Treasury Regulations) served as the impetus for the proliferation of “zeroed out GRATs.”

Jennings v. Smith. Under Jennings v. Smith, 161 F.2d 74 (2d Cir. 1947), a grantor can be named as the trustee of a trust and avoid violating IRC §§ 2036 and 2038 if the trustee retains no beneficial interest in the trust property and no power, other than fiduciary powers, the exercise or nonexercise of which is limited to a “fixed or ascertainable standard.” This ruling may be useful in crafting a defensive argument if faced with an IRS challenge for includability where a client was named as the trustee of his or her own irrevocable trust.

Rev. Rul. 59-60. Rev. Rul. 59-60, 1959-1 C.B. 237, remains the IRS’s definitive guidance on the approach, methods, and factors to be considered when valuing shares of closely held entities for estate and gift tax purposes. The value required to be reported is the “fair market value” of the asset. To offer guidance on how to provide a more accurate value and useful supporting documentation for transfers of these assets, the IRS issued Rev. Rul. 59-60. The ruling is especially helpful for appraisers of such assets because it sets forth and elaborates on eight factors required in the analysis.

Dickman v. Commissioner. IRC § 2501 taxes the transfer of property by gift. At issue in Dickman v. Commissioner, 465 U.S. 330 (1984), and the line of cases that preceded it is whether an interest-free loan constituted a gift of the foregone interest. The IRS lost this argument in Johnson v. Commissioner, 254 F. Supp. 73 (N.D. Tex. 1966), and Crown v. Commissioner, 585 F.2d 234 (7th Cir. 1996). In Dickman, the IRS again argued that a taxable gift was made equal to the interest. The Tax Court again held for the taxpayer. The Eleventh Circuit reversed. The Supreme Court affirmed Dickman. It concluded that the use of property was an interest in property for purposes of the gift tax.

Estate of Sanford v. Commissioner. If a donor transfers property to a trust and reserves the right to revoke the transfer or the right to alter the beneficial enjoyment of the donees, the transfer is not a completed gift. If the donor retains the power to revoke a transfer, the donor has retained a beneficial power over the trust and the trust is not a completed gift per the Supreme Court’s holding in Burnet v. Guggenheim. If the donor retains the power to alter the beneficial enjoyment of the donees, the transfer is also not a completed gift per the Supreme Court’s holding in Estate of Sanford v. Commissioner, 308 U.S. 39 (1939).

Commissioner v. Estate of Hubert. Typically, an executor has the choice to deduct administration expenses on the estate tax return or on the fiduciary income tax return—but not both. In Commissioner v. Estate of Hubert, 520 U.S. 93 (1997), the Supreme Court granted full marital and charitable deductions to an estate in which administration expenses had been deducted on the estate income tax return. The IRS’s subsequent decision to issue additional guidance on the administrative expense issue was an important result of this litigation. The final Regulations categorize the different types of estate administration expenses as either “management” or “transmission” expenses and clarify how each might reduce the marital and credit shelter shares.


More Information About the Real Property, Trust and Estate Law Section

This article is an abridged and edited version of one that originally appeared on page 55 of Probate & Property, November/December 2010 (24:6).

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