FCG Valuation Case E-Flash Stewart v. Commissioner

Authored by John Walker and Chris D. Treharne, ASA, MCBA, BVAL of Gibraltar Business Appraisals, Inc. a member firm of FCG Issue 12:14

Stewart v. Commissioner, Cite as 106 AFTR 2d 2010-XXXX, 08/09/2010,Estate of Margot Stewart, Deceased, Brandon Stewart, Executor Petitioner-Appellant, v. Commissioner of Internal Revenue, Respondent-Appellee
United States Court of Appeals for the Second Circuit, Docket No. 07-5370-ag, August 9, 2010

The IRS argued and the Tax Court ruled that decedent retained enjoyment or possession of a 49-percent undivided interest in a five-story New York brownstone gifted to the decedent’s son. Because the decedent did not enjoy full possession or enjoyment, however, the Second Circuit Court of Appeals ruled that the entire 49-percent interest was NOT includable in the gross estate and remanded the case to the Tax Court so that it could determine the includable percentage.

The Takeaway
In a split decision associated with an alleged IRC § 2036(a)(1) issue, the Second Circuit concluded that an implied agreement between mother and son prevented the mother from enjoying the entire economic benefit associated with her gift of a 49-percent undivided interest. More specifically, the majority ruled that IRC § 2036(a)(1) compliance is not an “all-or-nothing matter.” In doing so, it relied on prior court rulings1 which considered the following factors:

  • Continued exclusive possession by the donor, and
  • Withholding of possession from the donee.

Judge Livingston’s vigorous dissent is also noteworthy. He fears the majority’s decision will allow cohabitating family members to engage in sham transactions for tax avoidance purposes.

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