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Estate and Gift Tax
Temple University School of Law
Mandelbaum, Kathy

Estate & Gift Tax

Professor Mandelbaum

Fall 2013

Write in Code Book (allowed to have on Exam)

Will Study Ch.’s 11, 12, 13 & 14

I. Intro

1916 was 1st permanent Estate Tax, whatever you die with will be taxed based on its value

1924 was 1st Gift Tax, enforced until 1926 when repealed for unconst., reinstated in 1932

– natural consequence to counter estate tax avoidance by gifting

Congress added Sec. 2031 – 2042 in response to taxpayers avoiding estate taxes throughout period until 1986

1986 Congress enacted Generation Skipping Transfer Tax (Ch. 13 of Code)

– Grandmother to Daughter, Daughter to Granddaughter = 2 levels of gift taxes

– Simply giving from Grandmother to Granddaughter through trust was not double taxed prior to 1986 (retroactive repeal of law led to shitload of refunds – IRS no no)

– Goal is to put generation skipping transfers into same bracket as if it was to skipped party

2001 – Estate Tax Repealed, but didn’t have supermajority, so repeal was for only 1 year in 2010 and sunsetted to pre-2001 rates, the tax rates dropped while the exemption rates went up during the 10 year period

– Congress gave a two-tax system to choose from

2012 gave a two year law which gave a $5 million exemption with a 35% rate (that had consumer price indexed adjustments); Was to sunset in 2012 but Congress made it permanent from thereon and out (Today) and made the rates Unified, Exemption is $5.25 million and maximum rate is now 40% maximum marginal rate

Politics of Estate Tax

Argument of wealth should not be preserved like a plutocracy since children and donees did not earn it, There is special relief from the tax for farms and small businesses – Vs. – The wealth was earned and taxed once (double tax), Tax discourages savings, Farms and Small business might be sold to pay the tax (Farmer’s primary asset which his kid will not get)

Serious Mis-information: Nobody really pays the estate tax, politicians blow it out of proportion

Hypo in Supp 1.11

2013: D makes $5,364,000 gift to his child (must put in annual gift tax return April 15)

– ask how much they gifted in the past and if they filed past gift tax returns (1976 and on, builds and is affected by prior years)

– Annual exclusion of $14k a year to every person (§2503(c))

$5,364,000 is reduced to $5,350,000 from the gift exclusion

– §2001(c) is rate table for tentative tax computation

– Over $1 million, so $345,800 plus 40% of excess over $1 million

Tentative Tax is $2,085,800 ($345,800 + 40% of $4,350,000)

– §2010(c) is the applicable credit amount derived from the tax of the exclusion amount (§2001(c) rates on $5,250,000 exclusion = $2,045,800)

Tax is $40k (Tentative Tax – Applicable Credit Amount)

2014: D makes another gift of $214,000 to other child

– Annual exclusion reduces the gift by $14,000

$200,000 gift for tax purposes for 2014

– Must use the highest bracket since he already worked his way to top bracket in 2013 (adding all prior gifts of $5,350,000 + $200,000)

– Tax is $40,000 since in 40% bracket

Tax is $80,000 (aggregate the 2013 and 2014 gifts)

2015: D is left with $1,000,000 taxable estate when he dies (made $5.55 million prior gifts)

– $6,550,000 over $2,565,800 tentative tax minus the $40k and $80k gifts of 2013-14 minus the $2,045,800 in the unified credit = $400k Estate Tax

Each person is given a lifetime credit of $2,0450,800 to reduce their taxes (can use all at once or in increments over a lifetime)

– Problem did not take into account and generation skipping tax issues (shadow tax – 2nd layer)

– Nor did problem take into account CPI adjustments for 2014 and 2015

Estate tax is due 9 months after death (can generally get 6 month extension)

Estate tax has 100% deduction for outright marital gifts btw spouses (nothing in code defining marriage – DOMA struck down by Windsor, used to define)

– Marriage cert. are binding on IRS if challenge marital deduction (c/c ev.)

– Circumstantial ev. is binding for common law marriage purposes

Casey Johnson Case – Last seen alive Dec. 30 2009, and found dead in 2010 (family might

prefer 2009 death for stepped up basis or 2010 with no estate tax

– Had to look to state law for indeterminate death timing law (no Fed. Stat.) CA law was day body was found


Estate tax enacted in 1916, but taxes must pass const. muster

– Tax was either direct or indirect back then

– Direct taxes had to be apportioned among the states, thus Estate tax was not apportioned and had to be indirect

– Estate tax is a tax on the act of transferring property and not on the property tax itself

Bosch: (role of state law in interpreting fed. estate tax)

– Whether the federal government in an estate tax controversy was conclusively bound by a state trial court adjudication of property rights, when the United States was not made a party to the proceeding.

– Whether Bosch releasing general power to limited under state law was valid which led to no federal estate tax consequences

– Bosch wrote a will which created a revocable trust for his wife, Also gave Bosch’s wife a general power of appointment (general power of appointment where wife could get income from trust assets, but had the power to appoint remainder of property in trust at death – General power is taxable and included in GE), Wife then had the power converted to a limited appointment power in state Ct. declaratory judgment (release invalid), (Limited power of appointment limits who assets are appointed to – not taxable nor included in GE), Bosch died and the wife claimed a marital deduction for the money in the trust, IRS disagreed, Marital deduction was only allowable if there was a general power of appointment, Wife argued that the release signed converting it was invalid, Mrs. Bosch went to the State Court in New York and had the court agree that the release was invalid. IRS appealed arguing that the State Court decision did not (or should not) bind them.

The Court granted certiorari to decide whether a federal court or agency in a federal estate tax controversy was conclusively bound by a state trial court adjudication of property rights or characterization of property interests, when the United States was not made a party to such a proceeding. The controversy involved two different cases in which different panels of the same court of appeals had decided the cases differently.

Holding & Outcome: Where the federal estate tax liability turned upon the character of a property interest held and transferred by the decedent under state law, federal authorities were not bound by the determination made of that property interest by a state trial court. Accordingly, the judgment in accordance with the holding was affirmed while the judgment in contravention was reversed. Judgment of the

of the tree, Issue whether tree was includable in his GE under §2033, Gov’t said he didn’t have title or ownership but he had the ‘economic equivalence of ownership’ since it was in possession and control and D could transfer it to his heirs (citing Safe Deposit), Tree was in bails, Trouble in valuation whether sold as bales or in street value broken down, IRS assigned the tree as average quality and valued at street value, IRS held D had ability to transfer tree or its proceeds to his heirs (devisable/descendible), But don’t really have ability to transfer through legal system since it’s subject to forfeiture, Tricky since property that doesn’t get to heirs is not really subject to estate tax, Even if tree is included in GE it may not be deducted as an unforeseeable loss under §2054 due to public policy since expected to be forfeited to gov’t, IRS held includible under §2033 and not deductible, Heirs will have to pay (unfair)

PR 9152005: WWII GI was guarding priceless art from a medieval church and mailed it to his mother who was a college art professor, D lived lavish lifestyle even though he declared minimal income, D died and devised it all to his Bro Sis Niece & Nephew, D had sold a bunch of art during life to fund his lifestyle, D’s family enjoyed the art, Family hired atty who sold a bunch of art to buyers in Switzerland and stashed other art in safe deposit boxes, B/c executors never reported this art on Estate tax – SOL never began to run on this art, D had title against everyone but true owners of Medieval Church, D had ability to sell property or transfer it to heirs, D had substantial and beneficial enough of an exclusive interest to include art in GE under §2033, Art had value in black since D actually did sell art (IRS willing buyer and willing seller FMV) so IRS held value which was greater of black market value or legitimate value if D had good title, D could not get loss deductions since illegitimate title, IRS assessed a $8.6 million deficiency (not true value – somewhere around $200 million if had fee simple title), D’s family voluntarily returned art to German gov’t who paid D’s family $3 million, IRS settled for $100k

Dist. Ct. Ruling (VA W.D.): W died and left trust to pay H income for life where property would go to kids at H’s death, H was trustee and put trust principal in his own name (misappropriated $2.5 million), Commingled in brokerage acct., Executor reported all property on H’s estate tax return, Atty filed for refund on misappropriated assets, H had complete control and enjoyment over property during life, Ct. held property was includible since H’s exercised dominion and control as if it was his own and it was not restricted to its disposition which is enough of a beneficial interest, Kids could not sue since SOL ran so no deduction allowed for claims against the estate