The task of properly valuing and structuring lifetime transfers is rarely simple and never stagnant. Not only are a client’s assets and estate-planning desires continuously changing, but also the tools estate planners use to create tax-efficient planning are evolving as legislation changes, the Internal Revenue Service develops new lines of attack and courts issue new decisions. One planning technique that’s relatively recent and has had few opportunities for courts to interpret is what’s been referred to as the “net, net gift.”1 The Tax Court’s recent decision in Steinberg v. Commissioner in part validates this planning technique, but also leaves open issues that estate planners should consider. 

 

Liabilities as an Asset

The value of a gift for transfer tax purposes is generally the value of the property on the date of the gift as if it were transferred between a willing buyer and a willing seller (that is, the fair market value (FMV)).2 The FMV of the transferred property is reduced by any consideration paid to the donor, such that the value of the gift is the amount transferred that “exceeded the value of the consideration…”3 At first glance, this is a fairly straightforward principle. If the donor gives $200 worth of property in exchange for $100 from the donee, the value of the gift for transfer tax purposes isn’t the FMV of the property ($200), but the difference between the value of the property transferred by the donor and the consideration paid to the donor ($100). If the value of the consideration is equal to that of the property transferred, the transfer is a sale with no gift tax consequence. What constitutes consideration is broader than simply cash or cash equivalents (for example, a promissory note). The donee’s assumption of a liability of the donor is also consideration and can reduce the value of a gift. For example, if a donor gifts encumbered property to a donee and the donee assumes the liability, such as a mortgage on real property, the amount of assumed liability is consideration that reduces the value of the gift to the net equity received by the donee.4

A “net gift,” which is the term given when the donee assumes the donor’s gift tax liability on the gift, is a common example of the assumption of a liability reducing the value of the gift. The donor is liable for the payment of the gift tax under Internal Revenue Code Section 2502(c), and courts have held that the donee paying this liability constitutes consideration.5 The IRS has accepted the validity of the net gift, explaining in Revenue Ruling 75-72, that:

 

. . . if at the time of the transfer, the gift is made subject to a condition that the gift tax be paid by the donee or out of the transferred property, the donor receives consideration for the transfer in the amount of gift tax to be paid by the donee. 

 

This ruling creates a circular computation, explained in Rev. Rul. 75-72, because the assumption of the tax liability reduces the value of the gift, which in turn reduces the gift tax. This technique generally doesn’t provide transfer tax savings, as the net amount received by the donee is the same whether the donor pays the taxes on the gift or a larger gross amount is transferred to the donee, who then pays the tax. For example, if a donor makes a gift of $10 million and has no remaining gift tax exemption, he would owe federal gift tax in the amount of
$4 million. If the donor makes a “net gift” to the donee of $14 million, the gift tax payable by the donee is $4 million, leaving the donee with a net gift of $10 million.  

A “net gift” doesn’t create tax savings because the gift tax is exclusive, only levying a tax on the value of the gift. The estate tax, however, is an inclusive tax, levying a tax on all assets including the assets that are used to pay the estate tax liability. Prior to 1976, one of the perceived areas of estate and gift tax distortion was with respect to deathbed transfers, which reduced the value of an individual’s estate by the gift taxes paid. For example, using today’s estate tax rates, an individual who dies with a $20 million taxable estate and no remaining exemption would owe $8 million in federal estate taxes. However, if that same individual gifted $12 million before his death, he would have paid $4.8 million in gift tax, leaving him with only $3.2 million in his taxable estate. On his death, the remaining $3.2 million would create a $1.28 million estate tax liability. As a result, the individual only paid a total of $6.08 million in transfer taxes to transfer his $20 million, as opposed to the $8 million in taxes that would be owed if he held the property until his death.

To prevent this perceived abuse, Congress enacted what’s now IRC Section 2035(b) in 1976, which increases a decedent’s gross estate by the amount of any federal gift taxes paid by the decedent within three years of death.6 The Joint Committee on Taxation explained that the purpose of this provision was to eliminate “any incentive to make deathbed transfers to remove an amount equal to the gift taxes from the transfer tax base.”7 However, this provision applies to any gift made within three years of death, regardless of whether it was intended as a deathbed transfer to minimize transfer taxes. By adding the gift taxes paid back into the decedent’s taxable estate, an additional estate tax is imposed on the estate, which reduces the benefit to the estate by making lifetime gifts and paying gift tax. However, the amount added back is the gift tax paid, which is determined based on the value as of the date of the gift, so any subsequent appreciation on the gifted assets wouldn’t be subject to transfer taxes.

Applying the Section 2035(b) liability to the above example, the $4.8 million of gift taxes paid would be added to the value of the donor’s taxable estate as a phantom asset (note that no refund is provided for gift tax paid). The $4.8 million of deemed additional value, when added to the remaining $3.2 million of assets, produces a taxable estate of $8 million, which, at a
40 percent estate tax rate, produces a $3.2 million liability. The $3.2 million in estate taxes, combined with the $4.8 million of gifts taxes previously paid, equals a total of $8 million in transfer taxes—the same amount that the decedent would have paid had he died with a $20 million taxable estate. 

Under the IRC, the executor of the donor’s estate, not the donee, is liable for the additional estate tax owed as a result of Section 2035(b).8 However, in a relatively new planning technique, known as the “net, net gift,” the donee, in addition to assuming the gift tax liability, also assumes any federal and state estate tax liability that may result under Section 2035(b). As part of this technique, the donor treats as consideration the value of the assumption of the potential estate tax liability, with a corresponding reduction in the value of the gift.

 

McCord

The Tax Court first had the opportunity to consider the “net, net gift” in its 2003 decision in McCord v. Comm’r.9 In McCord, the taxpayers made a gift to their children, trusts for their children and charities. The children, individually and as trustees of their respective trusts, not only agreed to pay the gift tax incurred as a result of the gift, but also agreed to pay the potential estate taxes created by Section 2035(b) if either of the donors died within three years of the gift.

On the gift tax return, the taxpayers reduced the value of the gift by the mortality-adjusted present value of the contingent obligation of the donees to pay estate taxes that would be owed as a result of Section 2035(b). In calculating the value of the assumed liability, the taxpayers calculated the amount that would be due as a result of Section 2035(b) using the estate tax rate in effect at the time of the gift, adjusted for present value using the IRC Section 7520 interest rates and related mortality tables, taking into account the probability of each of the taxpayers surviving the three years. The taxpayers’ position that the Section 2035(b) liability reduces the value of the gift then necessitated a circular computation similar to that used with net gifts because the reduction in the value of the gift changes the potential Section 2035(b) liability, which, in turn, changes the gift tax owed, and so on.10 The IRS challenged treating the assumption of the liability as consideration because it was too speculative.

On its face, the assumption of a potential tax liability has value. If the donor dies within three years of the gift, the donor’s estate gains a substantial benefit for a relatively low cost, though as discussed below, this may increase the overall estate tax liability. The reduction in the value of the gift is based on the probability of the donor dying within three years. The real tax savings occur if the donor survives three years. If the donor survives, the donee is off the hook for reimbursing the estate, as the potential for Section 2035(b) liability is extinguished. If that’s the case, the donee never has to provide assets back to the donor’s estate, but there was a reduction in gift tax liability.

The Tax Court sided with the IRS in McCord, finding that the potential Section 2035(b) liability couldn’t be factored into the valuation of a gift because “no recognized method exists for approximating the burden of the estate tax with a sufficient degree of certitude to be effective for Federal gift tax purposes.”11 The IRS and the Tax Court didn’t question the method used in the mortality adjustment calculation. Rather, it concluded that such calculation depended on a fixed dollar amount for the potential Section 2035(b) liability that couldn’t be determined because the taxes owed would be based on the then unknown estate tax exemption and estate tax rate in effect at the time of the donor’s death. This was compared to the net gift, in which the gift tax liability the donee assumes is known at the time of the gift.  

However, the Tax Court didn’t end its discussion of the issue there, instead going on to raise its own argument against the validity of the net, net gift under “broader considerations of federal gift tax law.” The court took the position that the assumption of liability failed as consideration under the “estate depletion theory.” Citing the U.S. Supreme Court’s decision in Commissioner v. Wemyss, the court stated that “it is the benefit to the donor in money or money’s worth, rather than the detriment to the donee, that determines the existence and amount of any consideration offset.”12 In McCord, the Tax Court went further and reached the extraordinary conclusion that the donor and the donor’s estate were different, so anything owed to the donor’s estate wasn’t for the benefit of the donor but benefited the beneficiaries of the estate. As such, the Tax Court found that the only benefit the donor received was “peace of mind” that the liability would be paid, which wasn’t a benefit that constituted consideration for gift tax purposes.  

The Tax Court decision was appealed to the U.S. Court of Appeals for the Fifth Circuit, which returned a taxpayer friendly decision on this issue in finding that the assumption of the Section 2035(b) liability could be consideration and, thereby, reduce the value of a gift. Notably, in its decision, the Fifth Circuit didn’t address the Tax Court’s interpretation of the estate depletion theory. Instead, the Fifth Circuit only addressed the issue of whether the liability was too speculative to factor into the gift tax valuation. The court noted that any present obligation that may require performance on a future date is, by definition, speculative. However, it found that the question wasn’t whether the obligation was speculative, “but whether it is too speculative to be applicable, a very elastic yardstick indeed.”13 

The Fifth Circuit put itself into the shoes of the “willing buyer” and concluded that the potential Section 2035(b) liability was a factor that would be considered by a buyer in an arm’s-length transaction. The court noted that the IRS didn’t challenge the numbers used in the taxpayer’s calculation, including the estate tax rates, interest rate and mortality tables. The only point contested with respect to this issue was whether the potential estate tax liability under Section 2035(b) was too speculative to be included as consideration. The Fifth Circuit noted that in prior cases, the potential for changes to income tax or capital gains tax provisions hadn’t been considered factors that a willing buyer would take into consideration, instead focusing on the laws in effect at the time.14 Given that a donee would only be exposed to the potential Section 2035(b) liability for three years, the Fifth Circuit held that as a matter of law, a willing buyer would insist that the liability was sufficiently determinable that a hypothetical buyer would insist on the reduction of the FMV if acquiring the asset also involved acquiring this liability.

While the Fifth Circuit’s decision in Succession of McCord on the issue of the net, net gift was certainly welcome, there are many issues still surrounding this technique that weren’t resolved or even raised in its first case. Further, the IRS didn’t acquiesce in the decision. Thus, it provides little comfort to taxpayers living outside of the Fifth Circuit. Seven years later, the Tax Court in Steinberg agreed with the Fifth Circuit’s decision but left open the question of how to value the liability assumption for gift tax and estate tax purposes, leaving some uncertainty in the use of the net, net gift.      

 

Steinberg

In Steinberg, the Tax Court overruled its decision in McCord. In denying the IRS’ motion for summary judgment, the court found that the donee’s assumption of the potential Section 2035(b) liability wasn’t barred as a matter of law from being consideration for purposes of the gift tax valuation provisions because there were genuine factual disputes on the issues. 

In this case, the donor (age 89 at the time) entered into a binding gift agreement with her four daughters to gift cash and securities, and the donees agreed to assume and pay any federal gift tax liability and federal and state estate tax liability attributable to the gift. The gift agreement was the result of several months of negotiation between the donor and the donees, who were represented by separate counsel. An appraiser calculated the value of the gift, including determining the actuarial value of the donee’s assumption of the potential Section 2035(b) liability. The value of the net, net gift was determined to be over $71.5 million, reflecting a discount for the Section 2035(b) assumption of approximately $5.8 million, which resulted in a gift tax of $32 million that was paid by the donees.

The IRS didn’t argue that the amount was too speculative in its motion for summary judgment, but relied on the Tax Court’s estate depletion argument from McCord, claiming that the assumption didn’t provide a benefit to the donor and, therefore, didn’t constitute consideration in money or money’s worth. The Tax Court in Steinberg not only overruled its prior holding in McCord on the estate depletion theory, but also went a step further by overruling its position that the assumption was too speculative to calculate as a matter of law even though the Tax Court wasn’t bound to apply the Fifth Circuit’s decision in Succession of McCord because Steinberg wasn’t appealable to that circuit.

The Tax Court acknowledged that its distinction in McCord between a benefit to the donor’s estate and a benefit to the donor was incorrect. It also found that instead of viewing the donor’s estate as a party separate from the donor, “[f]or purposes of the estate depletion theory, the donor and the donor’s estate are inextricably bound.” Accordingly, a benefit to the donor’s estate in money’s worth, such as the payment of the Section 2035(b) liability, is a benefit to the donor. 

With respect to whether the assumption of the Section 2035(b) potential tax was too speculative, the Tax Court noted that the calculation wasn’t complex because it only required that the donor survive three years, and whether the donor’s survival was too speculative or highly remote was a factual issue. Contrary to its ruling in McCord, the Tax Court concluded that it couldn’t foreclose the prospect that it was possible to fix the value of estate taxes for purposes of the calculation despite changes to tax rates and exemptions and the uncertainty of the donor’s date of death. Further, it agreed with the Fifth Circuit that in appropriate circumstances, parties may take into account the Section 2035(b) liability in determining the FMV of the gifted assets.

While this is a favorable ruling for taxpayers, several questions remain in valuing and implementing a net, net gift. Though the majority opinion overruled the Tax Court’s prior holding in McCord that the assumption of the potential Section 2035(b) liability couldn’t be treated as consideration as a matter of law, the majority gave no indication of how it would resolve the questions of fact surrounding the net, net gift technique, including how to value the liability assumption for gift or estate tax purposes. However, two concurring opinions raise some of the outstanding and important questions the court will need to address either in Steinberg or future cases.15 The estate tax ramifications likely won’t be answered in Steinberg because the donor survived the 3-year period, but if the case proceeds without settlement, uncertainties regarding the availability and calculation of the net, net gift for gift tax purposes may be resolved. 

 

Valuation Considerations

As discussed above, the Tax Court in Steinberg and the Fifth Circuit in McCord agreed that the potential liability for estate taxes under Section 2035(b) wasn’t too speculative and would be taken into account in determining a value for the subject property by a willing buyer/willing seller. However, these decisions don’t explain how to calculate the value for gift tax purposes or what, if any, effect this payment right will have on the value of the donor’s estate if he dies within three years of making the gift. The concurring opinions in Steinberg and the IRS’ position in other cases shed some light on these questions, which planners should keep in mind when considering this technique.

Gift tax valuation. In both McCord and Steinberg, the taxpayer’s appraiser calculated the risk factor by using the estate and gift tax laws in effect on the date of the gift and the interest rate and mortality tables under Section 7520 to quantify the likelihood of the donor not surviving the 3-year period. One of the concurring opinions in Steinberg raises some of the potential factors that may significantly reduce the discount attributable to the risk factor, including state statutes and the donor’s will. Despite the complexity, the Section 2035(b) liability can result in a valuable discount to the value of the gift.  

The potential fluctuation in estate tax provisions led the Tax Court to reject the net, net gift in McCord. In the recent past, the estate tax rates, exemption amounts and even the existence of the estate tax were moving targets from year to year, including the temporary repeal of the estate tax in 2010. Currently, there’s increased stability in the federal estate tax laws; however, there’s still potential fluctuation that may need to be factored in, including an exemption amount that’s indexed annually for inflation, the potential effect of portability and any relevant considerations in the estate tax laws in the state of the donor’s residence. As discussed above, the Fifth Circuit supported the use of the gift and estate tax law as of the date of the gift. The Steinberg court acknowledged this ruling and the trend of other circuits accepting this position in the income tax context for gift valuation cases. However, the Tax Court only went so far as to say that it agreed with the Fifth Circuit that a willing buyer “may take into account a donee’s assumption of potential section 2035(b) estate tax liability in arriving at a sale price,” leaving open the appropriate methodology to do so for determination at trial.  

Another issue is the use of the Section 7520 interest rate in effect on the date of the gift, with the corresponding mortality tables using the age of the donor to calculate the risk factor and valuation discount as in McCord and Steinberg. The Section 7520 rates and mortality tables apply to determine “the value of any annuity, any interest for life or a term of years, or any remainder or reversionary interest” and were generally accepted as applicable to the present value calculation that would be needed here. However, the IRS recently issued Chief Counsel Advice, 201330033, in which it concluded that the Section 7520 tables couldn’t be used to value the risk premium in a self-cancelling installment note (SCIN) because it wasn’t one of the stated purposes, despite the fact that a SCIN, by definition, is an interest for a term of years or life of the payee. Rather, the IRS concluded that in applying the willing buyer/willing seller standard, a decedent’s actual life expectancy should be used in place of the mortality tables. While this pronouncement by the IRS hasn’t yet been accepted by a court and is currently being litigated in Estate of William Davidson,16 it suggests that the IRS may challenge the use of the Section 7520 tables to calculate the risk factor of assuming the potential Section 2035(b) estate tax liability.17

Another issue that may be factored in, which was raised by the IRS and discussed in a concurring opinion in Steinberg, is whether the donee’s agreement to pay any estate tax imposed by Section 2035(b) gives a benefit to the donor when the donor resides in a state whose apportionment statute would apportion the estate taxes to the donee in any event. The IRS’ position is that a donee’s promise to pay an amount he’s already obligated to pay under state law wouldn’t provide much, if any, benefit to the donor or the donor’s estate. Though the concurring opinion suggested that even in such case, there may be some benefit ascribed to ease of enforcement and collection with a contract right, particularly if the donee isn’t a beneficiary of the estate. If the donee is a beneficiary under the donor’s will, then the executor of the estate may be able to reduce the donee’s bequest by the amount of Section 2035(b) tax, which may further reduce any value attributable to the donee’s agreement to pay the tax at the time of the gift. If the IRS succeeds on this argument, with respect to gifts made by donors residing in states with such an apportionment statute, this calculation may become a facts-and-circumstances inquiry taking into consideration the state law, whether the donee is or may be a beneficiary of the estate and the ability to enforce the donee’s statutory obligation without the gift agreement. 

However, the state apportionment argument appears to be at odds with both the willing buyer/willing seller test and the estate depletion theory. As the taxpayer’s counsel in Steinberg argued, it’s immaterial whether the obligation is imposed by an agreement among the parties or by state statute—in either case the donee pays the federal tax liability otherwise owed by the donor. A willing buyer wouldn’t care how the liability is imposed, just that he’s exposed to a potential liability under Section 2035(b), which should have an impact on the value of the property transferred. Likewise, under the estate depletion theory, the donor’s estate is replenished by the payment of the liability by the donee regardless of how it’s imposed. 

The state apportionment question poses some risk for the taxpayer in Steinberg, but could be an even riskier proposition for the IRS. If the Tax Court ultimately determines that the net, net gift agreement itself has little value in states with apportionment statutes because the statute, and not the agreement, imposes the liability, this would open the door for taxpayers in states that don’t have such an apportionment statute to take advantage of the discount produced by the net, net gift technique. As a result, the effectiveness of the net, net gift could vary between taxpayers based on their domicile at the time of the gift. 

Further, to be victorious, the IRS would need to successfully argue that the potential Section 2035(b) liability imposed by the statute is itself not consideration under the willing buyer/willing seller standard. If the IRS isn’t able to convince the Tax Court that a willing buyer would pay face value for an asset when a potential Section 2035(b) estate tax liability is imposed by statute as opposed to an agreement (despite the same result in either case), all taxable gifts in states with such apportionment clauses could claim a discount even in the absence of a written agreement to assume the liability.  

Estate tax valuation. In Steinberg, the donor survived the 3-year period after making the gift, so the donees didn’t have to pay on the Section 2035(b) obligation. However, the potential effect on a donor’s estate if he dies within the 3-year window is an important consideration in the planning. The donor’s estate may be increased by the taxes paid by the donee under the gift agreement and, as a result, there’s the potential that the planning could result in an overall increase in the donor’s taxable estate. As noted in one of the concurring opinions, although the issue isn’t before the court because the taxpayer survived, the taxpayer conceded that the contractual obligation to pay the estate tax liability is an asset of the estate under IRC Section 2031(a). If this is correct and, for example, the donee pays $1 million of estate tax due under Section 2035(b), the donor’s taxable estate would be increased by $1 million of value. Such a result would trigger an estate tax on the additional value. Using today’s federal estate tax rate of 40 percent, the additional federal estate tax liability would be $400,000, in addition to a state estate tax that may be due on the added value. However, applying the IRS’ rationale in its apportionment clause argument, if the state apportionment statute at the time of the donor’s death apportions the tax to the donee and a discount isn’t available on the assumption of the liability for gift tax purposes, there should be no additional value to the estate when the donee pays the tax. 

In either event, the potential for inclusion in the donor’s estate of the value adds a level of risk to this planning technique.18 Though the net, net gift’s reduction of the gift tax owed would reduce the Section 2035(b) liability, the amount included in the estate as a result of the donee’s obligation to pay the tax could mean that more transfer taxes would ultimately be owed than if the net, net gift wasn’t employed. Thus, this technique is better suited for clients who are likely to survive three years from the date of the gift to achieve the benefit of a reduced gift tax liability without a significant risk that the donee will have to pay on its Section 2035(b) obligation.   

 

Implementing the Net, Net Gift 

The net, net gift, despite the continuing uncertainty, could be a useful planning tool for the right client who’s making a taxable gift to reduce the amount of gift tax due on the transfer. Some of the factors planners should consider in light of Steinberg are:

 

1. Client’s age. The discount is tied to the probability of the donee having to pay the liability, and that probability is likely determined by using the IRS’ published mortality tables. Therefore, the older the client is, the greater the chance the donee will be deemed to have to pay the Section 2035(b) liability, thus producing a larger discount. As noted above, the IRS may challenge the use of the Section 7520 mortality tables in favor of the client’s specific life expectancy.

2. Client’s health. The net, net gift technique is successful from a tax perspective if the donor survives the three years. Therefore, this planning tool may not be appropriate if the client isn’t in good health or otherwise unlikely to survive the 3-year period. There’s always the risk that a client who’s healthy at the time of the gift doesn’t survive three years, which is what justifies the discount, and clients should be apprised of the risk.

3. State apportionment statute of donor’s domicile. Planners should be aware of the apportionment statute in the state where the client is domiciled. As discussed above, there remains uncertainty for clients in states where state law may apportion to the donee the Section 2035(b) liability includible in the estate, such as New York, where the taxpayer in Steinberg was domiciled.19 For states with such apportionment statutes, this is an open issue that may be addressed by the Tax Court in Steinberg, along with related issues, such as the effect of the donor’s will and the donee’s status as a potential beneficiary of the donor’s estate. 

4. Estate tax inclusion. If the donee’s obligation to pay the Section 2035(b) liability increases the value of the donor’s taxable estate, it may trigger an increase in overall estate taxes that exceeds the tax savings achieved from the discount. 

5. Effect on donee. The agreement to pay the Section 2035(b) liability has value because the donee is agreeing to pay an obligation of the estate. The reduction in the gift tax value reflects the economic realities of the transaction. It’s important that the donee understand that he’ll be required to pay the liability if the donor dies within three years of making the gift, that the liability may significantly exceed the discount achieved for gift tax purposes and that the overall estate tax bill may be increased as a result.   

In the right circumstances, the net, net gift could provide a significant valuation discount for gift tax purposes. For an older client who’s likely to survive the 3-year term, there’s a benefit for both the donor and the donee. However, if the donor doesn’t survive the 3-year period, the benefit from the discount may be wiped out or even cause the estate to have a larger estate tax bill than it may have had otherwise. Like any relatively new planning technique, there are issues left to be resolved by planners, the IRS and courts alike. With these issues comes some level of risk that should be weighed against the potential benefits of the net, net gift.        

 

Endnotes

1. Michael S. Arlein and William H. Frazier, “The Net, Net Gift,” Trusts & Estates (August 2008) at p. 25 (hereinafter “The Net, Net Gift”); Steinberg v. Commissioner, 141 T.C. No. 8 (2013).

2. Internal Revenue Code Section 2512(a); Treasury Regulations Section 25.2512-1.

3. IRC Section 2512(b).

4. See, e.g., D.S. Jackman v. Comm’r, 44 BTA 704 (1941).

5. See Turner v. Comm’r, 49 T.C. 356, 360-361 (1968), aff’d per curiam, 410 F.2d 752 (6th Cir. 1969).

6. What’s currently IRC Section 2035(b) was Section 2035(c) until 1997. Section 2035(b) only adds back federal gift taxes paid; thus, gift taxes paid in the states that currently have a gift tax (Connecticut and Minnesota) would effectively reduce the federal taxable estate. 

7. Borris I. Bittker and Lawrence Lokken, “Federal Taxation of Income, Estates, and Gift,” 126.4.3 (quoting Staff of Joint Comm. on Tax’n, 94th Cong., 2d Sess., General Explanation of the Tax Reform Act of 1976, reprinted in 1976-3 CB (Vol. 2) 1, 541).

8. IRC Section 2002.

9. McCord v. Comm’r, 120 T.C. 358, 399-404 (2003). While other courts have decided cases in which the taxpayer attempted to claim the assumption of estate taxes or Section 2035(b) liability as consideration, these cases are sufficiently different factually. The U.S. Court of Appeals for the Fifth Circuit in McCord and the Tax Court in Steinberg found they provide little guidance and are inapplicable. See Armstrong v. United States, 277 F.3d 490 (4th Cir. 2002); Murray v. U.S., 687 F.2d 386 (Ct. Cl. 1982).

10. For a more detailed explanation of the calculation used, William H. Frazier, the appraiser for the taxpayer in McCord and Steinberg who calculated the discount, is also the co-author of “The Net, Net Gift,” which provides a thorough discussion of the calculation methodology used. But see Daniel B. Evans and William H. Frazier, “Letter to the Editor and Response,” Trusts & Estates (November 2008) at pp. 12-13. (The letter that William Frazier responds to provides additional thoughts and an adjustment to the methodology used in “The Net, Net Gift,” which should be applied.)

11. McCord, supra note 9 at 402.

12. Ibid., at 403 (citing Comm’r v. Wemyss, 324 U.S. 303, 307-308 (1945)). 

13. Succession of McCord v. Comm’r, 461 F.3d 614, 629 (5th Cir. 2006).

14. Ibid., at 631-632 (citing Estate of Dunn v. Comm’r, 301 F.3d 339 (5th Cir. 2002) (finding built-in capital gains could be used in reducing the value of an entity for transfer tax purposes)); see also Harrison v. Comm’r, 17 T.C. 1350 (1952) (holding that a donee trust’s obligation to pay all future income taxes of the donor isn’t too speculative and may therefore reduce the value of the gift to the trust).

15. There was also a dissenting opinion by Judge James S. Halpern, the author of the Tax Court’s opinion in McCord, providing a policy-based argument that Congress’ intent in enacting Section 2035(b) should prevent its application to provide tax savings. 

16. Tax Court Docket No. 013748-13, filed June 14, 2013.

17. See Marissa Dungey and James I. Dougherty, “IRS SCINs a Cat: CCA 201330033 Limits Use of Mortality Tables” (Aug. 5, 2013), http://wealthmanagement .com/estate-planning/irs-scins-cat.

18. This potential risk wasn’t discussed in “The Net, Net Gift,” which takes the position that there are tax savings even if the donor dies within the 3-year period, because the value of the Section 2035(b) liability is lowered as the value of the gift tax was lowered by the assumption of the Section 2035(b) liability. That article’s position was implicitly accepted by Judge Halpern in his dissenting opinion and was at the center of his argument that the technique would put taxpayers in a better position than if Section 2035(b) didn’t exist. 

19. N.Y. Est. Powers & Trusts Section 2-1.8, see Application of Rhodes, 868 N.Y.S.2d 513 (N.Y. Sur. Ct. 2008).