Judge Calabresi, Circuit Court Judge for the Second Circuit U.S. Court of Appeals, wrote an opinion, on behalf of the court, examining 26 U.S.C. § 2036(a)(1) and whether an implied agreement existed to retain enjoyment in a transfer of half of the property by gift. Specifically, the court analyzed whether a retained interest in the enjoyment of the property existed in its residential and commercial use. To infer an implied agreement in the enjoyment of the residential portion of the property, the court found that: (1) the donor must enjoy exclusive possession of the property and (2) the donor must withhold possession from the donee. In this case, the court found that the donor did not have an implied agreement in the enjoyment of the residential portion of the property, but the court did find an implied agreement to enjoy the commercial use of the property.
The court remanded the case back to the Tax Court to apportion the benefit of the implied agreement. The court made clear that the Tax Court could not conclude that a donor retained the enjoyment of 100% of the economic benefit by the mere existence of the agreement. The court adopts the approach in IRS Revenue Ruling 79-109 to determine the apportionment. Specifically, the court must examine the income retained by the donor and determine what portion of the estate would have to be apportioned to retain that income. Also, the court makes clear that the distribution of income cannot be looked at in isolation. Rather, the court must also examine the distribution of the expenses. Should the donor incur a greater portion of the expenses, then that should factor into the apportionment of the income.
Please click here to view the entire opinion.
Posted by Shahzeb Gaziani, Senior Associate Editor, Wealth Strategies Journal
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