What was Fair Market Value of Mother’s Gift?

January 20, 2014

The U.S. Tax Court has decided in favor of a mother who gave her children property in exchange for their promise to pay any additional estate tax liability that might arise if she died within three years of making the gift.

The fair market value of that property for gift tax purposes was reduced by the value of the children’s assumption of the potential estate tax liability.

Jean Steinberg entered into a binding gift agreement with her daughters under which she gave them cash and securities.In exchange, the daughters agreed to assume and pay any estate tax liability imposed as a result of the gifts in the event that Steinberg passed away within three years of making the gifts.

If she were to die within the three years, an additional estate tax would result from the inclusion in her estate of any gift taxes paid at the time of the gifts.

In calculating for gift tax purposes the fair market value of the property transferred to the daughters, Steinberg reduced the fair market value of the cash and securities by an amount representing the value of the daughters’ assumption of the potential estate tax liability.

On audit, the IRS disallowed the discount for the recipients’ assumption of the potential estate tax liability. The IRS claimed that the recipients’ assumption of the potential liability did not increase the value of Steinberg’s estate and therefore did not constitute consideration in money or money’s worth in exchange for the gifts.

In a split decision, the Tax Court concluded that, because the value of the obligation assumed by the daughters was not barred as a matter of law from being consideration in money or money’s worth, the fair market value of Steinberg’s taxable gift may be determined with reference to the daughters’ assumption of the potential estate tax liability (Jean Steinberg v. Commissioner, 141 TC No. 8, Sept. 30, 2013).