In Uncategorized on 08/22/2017 at 16:55

The ongoing tussles between the nieces of the late Dr. Sheldon Sommers, art connoisseur, and his once and present spouse Bernice comes to a conclusion in Estate of Sheldon C. Sommers, Deceased, Stephan C. Chait, Temporary Administrator, Petitioner, And Wendy Sommers, Julie Sommers Neuman, and Mary Lee Sommers-Gosz, Intervenors, 149 T. C. 8, filed 8/22/17, Judge Halpern sending once and present spouse to trial, and bailing out the nieces.

Y’want backstory? Read my blogpost “Artistically Gifted,” 1/11/13. There now.

The Temp Adm’r wants a deduction for the gift tax the nieces ponied up for their gifts. IRS says Section 2035(b) claws the gift taxes paid by the nieces into the taxable estate, to prevent late-in-life gifts from undermining the estate tax.

Judge Halpern: “Although allowing decedent’s estate to deduct the gift tax owed at his death on his 2002 gifts to intervenors would frustrate the policy underlying section 2035(b), as respondent argues and petitioner concedes, disallowance of the deduction need not rest on policy considerations alone.  Longstanding precedent establishes that a claim against an estate is deductible in computing estate tax liability only to the extent that it exceeds any right to reimbursement to which its payment would give rise.” 149 T. C. 8, at pp. 16-17. (Citations omitted).

Besides, “Because intervenors agreed to pay any gift tax arising from those gifts, the estate’s payment of that tax would have given rise to a right of reimbursement from intervenors that must be taken into account in determining decedent’s taxable estate–either as a separate asset or as a reduction in the amount that would otherwise have been deductible under section 2053(a)(3) as a claim against the estate.  Because the estate would have been entitled to reimbursement of the full amount of the gift tax paid, no deduction can be allowed.” 149 T. C. 8, at pp. 18-19. And mox nix whether the right to recover the gift tax arose via subrogation or contractual obligation to contribute.

Besides, under the “net gift” regime established by the 1976 Tax Reform Act, when the donee pays the donor’s tax, the donee is a mere conduit. It’s another case of one party’s paying another’s liability, therefore as if the other paid it their own self. And same-same whether donee paid before or after donor died.

The ultimate allegiance is to the rule that net gifting can’t diminish the decedent’s estate by end-of-life gifts.

To what extent marital assets were used to pay debts and administrative expenses, thereby reducing the marital exemption, is a fact question. As for who paid what, how much and when, that needs a trial, not partial summary J.

Finally, the Temp Adm’r wants to nail the nieces for contribution to the estate tax. But, after an exhaustive and exhausting gallop through half a dozen State apportionment statutes, Judge Halpern concludes that the nieces got no property includible in the gross estate, so they don’t owe any of the estate tax.

As for Bernice’s marital share being subject to tax, there’s another long story.

“On the record before us, we are unable to determine the extent to which the estate tax will reduce the value of the marital share of decedent’s estate.  As noted above, to the extent that Bernice used property that would otherwise have been exempt from claims against the estate to pay debts or  expenses, she may have been a ‘transferee’ subject to apportionment of estate tax.  If neither Bernice nor intervenors are transferees subject to apportionment under the New Jersey statute, the Federal estate tax liability would be apportioned entirely to the fiduciary under N.J. Stat. Ann. sec. 3B:24-4(a).  To the extent that any tax apportioned to the fiduciary reduces the residuary distributions ultimately made to Bernice’s successors, the tax will be paid out of the marital share of the estate.  Petitioner’s claim to a marital deduction that includes only the value of nonprobate property, however, may indicate that, even without regard to the estate tax deficiency, decedent’s probate estate would have been entirely consumed by debts and expenses.  To the extent that petitioner pays estate tax out of assets that would otherwise have been used to pays debts or expenses, the tax would not reduce the value of the property ultimately received by Bernice and her successors.  (To that extent, the burden of the estate tax would be borne by the estate’s creditors.)  Moreover, the allocation to petitioner under N.J. Stat. Ann. sec. 3B:24-4(a) of an amount of estate tax in excess of the value of the assets remaining under his control may have no economic consequence.  Instead, the ultimate incidence of that portion of tax might depend on the vagaries of the Service’s exercise of discretion in choosing among alternative sources for the tax’s collection.  Whoever pays that portion of the estate tax would presumably have a right to reimbursement from a fiduciary with no assets remaining under his control from which to make the required reimbursement.  We need not address those potential conundrums at this juncture.  At this stage of the proceedings, and on the limited record before us, we conclude only that N.J. Stat. Ann. sec. 3B:24-4(b), which requires that Federal estate tax be apportioned in a manner that preserves for the benefit of a decedent’s spouse, to the extent possible, the benefit of any marital deduction allowed by section 2056(a), provides us insufficient grounds to rule as a matter of law that any estate tax due in this case cannot affect the allowable marital deduction.” 149 T. C. 8, at pp. 73-74.

See above; what did Bernice pay, if anything, to whom and when? Questions of fact.

So Bernice battles on, while the nieces walk.

How artistic.


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