CASES AND MATERIALS

FEDERAL WEALTHTRANSFER TAXATION

SIXTH EDITION

by

PAUL R. MCDANIELJames J. Freeland Eminent Scholar in Taxation and Professor of LawUniversity of Florida Levin College of Law

JAMES R. REPETTIWilliam J. Kenealy, S.J. Professor of LawBoston College Law School

Paul L. CaronAssociate Dean of Faculty and Charles Hartsock Professor of LawUniversity of Cincinnati College of Law

?PUNDATION_P RES S

2009 THOMSON REUTERS"

SUMMARY OF CONTENTS

PREFACE — - - - - - - - ,—. v

ACKNOWLEDGEMENTS - - - - - - vii

TABLE OF CASES, REVENUE RULINGS AND PROCEDURES .— —- - - xxix

PART I Overview of the Federal Wealth Transfer Tax System 1

CHAPTER 1 An Historical Review - - —— — 2

A. Introduction — - — .— — — - 2B. From 1789 to the Civil War — - — .— - 2C. The Civil War Period - — — — —- —- 3D. 1870-1916: Further Congressional Experimentation - 3E. 1916-1939: Development of a Basic Structure-- — - - 4F. 1940-1947: World War II Period — —- - -— 6G. 1948-1976 - - — — —- - —- - 7H. 1976 to 2001: Interstitial Reform - — — —- 8I. The 2001 Act: Repeal (and Resurrection) of the "Death Tax" - 12

CHAPTER 2 The Legislative Process — - ~~ 154

CHAPTER 3 The Administrative Process — - — - 20

A. General Organization of the Internal Revenue Service -- -- 20B. Administrative Interpretation of the Tax Laws - - - -- 21

CHAPTER 4 The Judicial Process - - - - — 25

A. Original Jurisdiction .. — - - - - 25B. Appellate Jurisdiction - -- - - — - 27

CHAPTER 5 A Brief Summary of Transfer Tax Procedure - 28

A. Filing of Return and Payment of Tax - - — 28B. Investigation of Returns and Settlement Procedures 32C. Tax Court Proceedings — —- — — —. 33D. Refund Procedures-- - — —- -- — 34E. Statutes of Limitations, Interest, and Penalties---- - 35

CHAPTER 6 Data on U.S. Wealth and Wealth Transfer Taxes 38

A. Distribution of Wealth in the United States and in the World 38B. Wealth Transfer Tax Data — — — -— — - 43

I X

SUMMARY OF CONTENTS

CHAPTER 7 Policy Aspects of a Transfer Tax - — - 49

A. Introduction - -- -- - - -- 49B. The Structure of a Transfer Tax ..— - - — — 49C. Some Particular Issues in the Present Transfer Tax System —- 50

CHAPTER 8 Constitutional Aspects of Transfer Taxes - — — 54

A. Power to Impose Transfer Taxes - - - - 54B. Power to Apply Transfer Taxes Retroactively.--- - - - 55

CHAPTER 9 Basic Application of the Transfer Taxes—- - 65

A. General Description of Gift Tax - — - -- 65B. General Description of Estate Tax - - - . - —. 67C. General Description of Generation—Skipping Transfer Tax — - 69

CHAPTER 10 Coordinating the Computation of the Estate and GiftTaxes - - - - - - - - - - 73

CHAPTER 11 The Role of State Law - - -i— - - 82

PART II Composition of the Tax Base: General Principles 99

CHAPTER 12 The Scope of the Estate Tax: § 2033 - - —. 100

A. Beneficial Ownership — - - — - — — 100

B. Interests Arising at Death---- - - - - -- - 109C. "Property" vs. "Expectancy" - - - — - 113D. Bank Deposits, Checks, and Notes---- - - - 118E. Right to Accrued Payments — - - — — —. 121

CHAPTER 13 The Scope of the Gift Tax: §§ 2501 and 2511 - 124

A. Is There a "Transfer" of "Property"?—- - - - —- 125B. When is the Transfer "Completed"? -— - - - -— 143C. What is a "Gift"? - - 165

CHAPTER 14 Transfers of Property in Satisfaction of MaritalRights: Estate and Gift Taxes - - - - —- 177

A. Dower and Curtesy Interests in the Gross Estate —- - 177B. Marital Rights as Consideration--- - - - —. 178C. Transfers Incident to Separation and Divorce - - - 183

9

SUMMARY OF CONTENTS xi

PART III Composition of the Tax Base: Specific Transfers—.. 201

CHAPTER 15 Transfers with Retained Powers and Rights 202

A. Background and Statutory Framework of §§ 2036-2038 - 202

B. Transfers with Retained Life Estates: § 2036 — - 204

CHAPTER 16 Transfers with Retained Powers to Alter, Amend,Revoke, or Terminate: § 2038 —--— - 255

CHAPTER 17 Transfers with Retained Reversionary Interests:§ 2037 - - - - - 269

A. Operation of § 2037 - - - - - 270B. Policy Considerations for §§ 2036-2038 - - 275

CHAPTER 18 The "Adequate and Full Consideration" Exception for§§ 2036-2038 - - - - - 279

CHAPTER 19 Gift Tax Effects of Transfers with Retained Interestsor Powers - - - - - - — 299

A. Transfers with Retained Powers --- --- --- - —. 299B. Transfers with Retained Interests —- -- - - - 314

CHAPTER 20 Annuities and Employee Benefits-— - - - 320

A. The Scope of § 2039- - - - ~~ - - 321B. The Treatment of Employee Benefits Under Other Code Provi-

sions - - — - - - 335

CHAPTER 21 Joint Interests in Property- - - - 338

A. Estate Tax — — - —— —- —- 339B. Gift Tax - - - - - - 350C. Estate Planning Aspects of Jointly Owned Property - 353

CHAPTER 22 Powers of Appointment — - —.. 355

A. An Overview of Powers of Appointment - — - 355B. Estate Taxation of Powers of Appointment-- —- —- 356C. Gift Taxation of Powers of Appointment - — — 372

xii SUMMARY OF CONTENTS

CHAPTER 23 Life Insurance- 377

A. Estate Tax Treatment of Life Insurance — — - 377B. Gift Tax Treatment of Life Insurance - - 410

CHAPTER 24 Transfers Made Within Three Years of Death - — 418

A. Historical Background — - - — 418B. Technical Aspects of § 2035 —- — - - —- 421

CHAPTER 25 Disclaimers- - - 434

A. Disclaimers in General — - — - — 434B. Disclaimers in Situations Involving Joint Tenancies and Powers of

Appointment-- - — - - — —. 441C. Policy Aspects of Disclaimers--- - —- —- — 443

PART IV Exclusions, Deductions, and Credits Necessary toDefine the Tax Base — — - — - - 445

CHAPTER 26 The Gift Tax Annual Exclusion: Resolution of Admin-istrative Problems of Taxing Small Transfers — - 446

i

A. Present Interests Versus Future Interests—In General — - - - 448B. Gifts to Minors - — — - — - — 460C. Policy Issues - - - - — - — 487D. Transfers for Tuition or Medical Expenses - — — 488

CHAPTER 27 Estate Tax Deductions Necessary to Define the NetTransfer - - — — —- — 491

A. The Role of State Law — - - - — 492B. Specific Deductions - — - - - —. 504

CHAPTER 28 The Unified Transfer Tax Credit - 525

PART V Other Deductions and Credits 531

CHAPTER 29 The Deduction for Charitable Contributions 532

A. Outright Transfers to Charity - - - 532B. Split-Interest Transfers to Charity — - —- 543C. Policy Issues - — - - —- 548CHAPTER 30 Other Tax Credits - —- - —- 552

A. The Credit for Tax on Prior Transfers — — —- - 552B. The State Death Tax Credit - - - — 559

SUMMARY OF CONTENTS xiii

CHAPTER 31 Tax Expenditures in the Wealth Transfer Taxes 561

A. The Tax Expenditure Concept — --- — — - 561B. Definition of "Tax Expenditure"— —- - - 562C. Wealth Transfer Tax Expenditures by Budget Function - —- 563

PART VI The Taxable Unit 571

CHAPTER 32 The Marital Deduction L — - — 572

A. Introduction — - — - — 572B. The Estate Tax Marital Deduction - - - 574C. The Gift Tax Marital Deduction - - —- 637D. Split Gifts - - - - - 638E. Planning Considerations - - - - 640F. Policy Issues - — - - —- - - 645PART VII The Taxation of Transfers from Generation to

Generation — - — - — — 647

CHAPTER 33 The Generation-Skipping Tax and the Credit for Taxon Prior Transfers - — 648

A. The Concept of Periodicity in a Transfer Tax--- - 648B. Transfers Subject to the GST Tax — - - — 653C. Exceptions to Generation-Skipping Transfers - - 658D. Calculating the GST Tax - - — - —. 660E. The GST Exemption and the Applicable Rate - - 663F. Interrelationships of GST Tax with Estate, Gift and Income Taxes 669G. Effective Date Rules — - - - - 671H. Policy Issues —- — — - — 671

PART VIII Valuation - 675

CHAPTER 34 Time of Valuation - — —- - 676

A. The Valuation Date - - — - 676

CHAPTER 35 Valuation Methods - - —- - 687

A. Valuation of Business Interests - — - 687B. Valuation of Real Property— - - - 719C. The Use of Mortality and Interest Tables in Valuation —- 723

CHAPTER 36 Impact of Buy-Sell Agreements, Lapsing Rights andLiquidation Restrictions on Valuation —- - - 728

A. Restrictive Transfer Agreements - - - - 728B. Lapsing Rights and Restrictions on Liquidation: § 2704 - 752

xiv SUMMARY OF CONTENTS

CHAPTER 37 Estate Freezes 758

A. Special Valuation Rules for Certain Interests in Corporations andPartnerships: § 2701 759

B. Special Valuation Rules for Trusts and Term Interests: § 2702 770

PART IX Administrative Aspects of Wealth Transfer Taxes —. 779

CHAPTER 38 Tax Responsibilities of the Executor—- —- 780

A. Liquidity Problems 781

B. Post-Mortem Estate Planning.— 796C. Personal Liability of the Executor 800

> D. Ethical Problems Involved in the Administration of Estates 806

PART X International Aspects of Wealth Transfer Taxation... 823

CHAPTER 39 U.S. Jurisdictional Principles — 824

A. Citizenship — — 824

B. Expatriation to Avoid U.S. Wealth Transfer Taxes — 825C. Domicile 4— 829D. Situs Rules 832

CHAPTER 40 The Foreign Tax Credit - 838

CHAPTER 41 Transfer to a Non-Citizen Spouse 846

CHAPTER 42 Transfers by Non-Resident Aliens 853

CHAPTER 43 Wealth Transfer Tax Treaties 856

APPENDIX 861

INDEX 863

TABLE OF CONTENTS

PREFACE — - — . — — v

ACKNOWLEDGEMENTS - - — — - vii

TABLE OF CASES, REVENUE RULINGS AND PROCEDURES — xxix

PART I Overview of the Federal Wealth Transfer Tax System 1

CHAPTER 1 An Historical Review —- — 2

A. Introduction--- *- — —- - 2

B. From 1789 to the Civil War - - - 2C. The Civil War Period .—. 3D. 1870-1916: Further Congressional Experimentation 3E. 1916-1939: Development of a Basic Structure —- —.. 4F. 1940-1947: World War II Period — —- -— 6G. 1948-1976 - - 7H. 1976 to 2001: Interstitial Reform — — — 8I. The 2001 Act: Repeal (and Resurrection) of the "Death Tax" 12

CHAPTER 2 The Legislative Process - — *. 15

CHAPTER 3 The Administrative Process- — - 20

A. General Organization of the Internal Revenue Service 20

B. Administrative Interpretation of the Tax Laws 21CHAPTER 4 The Judicial Process — — — 25

A. Original Jurisdiction —- - - — 25B. Appellate Jurisdiction — - — 27

CHAPTER 5 A Brief Summary of Transfer Tax Procedure 28

A. Filing of Return and Payment of Tax - - - 281. Gift Tax —- —- - — 282. Estate Tax- - —- — —- 293. Generation-Skipping Tax — — — 31

B. Investigation of Returns and Settlement Procedures - - 32C. Tax Court Proceedings - —- - —- —- 33D. Refund Procedures - - — - 34E. Statutes of Limitations, Interest, and Penalties - - 35

xv

x v i TABLE OF CONTENTS

CHAPTER 6 Data on U.S. Wealth and Wealth Transfer Taxes 38

A. Distribution of Wealth in the United States and in the World 38Kopczuk & Saez, Top Wealth Shares in the United States, 1916-

2000: Evidence From Estate Tax Returns — 38Davies, Sandstrom, Shorrocks & Wolff, The World Distribution of

Household Wealth — 40B. Wealth Transfer Tax Data —- 43

Joint Committee on Taxation- History, Present Law, and Analysisof The Federal Wealth Transfer Tax System - — 43

CHAPTER 7 Policy Aspects of a Transfer Tax 49

A. Introduction 49B. The Structure of a Transfer Tax - 49C. Some Particular Issues in the Present Transfer Tax System 50

CHAPTER 8 Constitutional Aspects of Transfer Taxes 54

A. Power to Impose Transfer Taxes- — — 54Illustrative Material — — 54

B. Power to Apply Transfer Taxes Retroactively-->- —- 55United States v. Carlton — — 55NationsBank v. United States — - 60Illustrative Material - 64

CHAPTER 9 Basic Application of the Transfer Taxes - - 65

A. General Description of Gift Tax —- 65B. General Description of Estate Tax 67C. General Description of Generation-Skipping Transfer Tax 69

CHAPTER 10 Coordinating the Computation of the Estateand Gift Taxes— —- — - 73

House Ways and Means Committee Report, Revenue ReconciliationBill of 1997 - 73

Illustrative Material —- —- - 74

CHAPTER 11 The Role of State Law — 82

Commissioner v. Estate of Bosch — —- 82Illustrative Material — 91Estate of Goree v. Commissioner —- — 91Illustrative Material —- 95

TABLE OF CONTENTS xvii

PART II Composition of the Tax Base: General Principles 99

CHAPTER 12 The Scope of the Estate Tax: § 2033 — 100

A. Beneficial Ownership — — — 100

Helvering v. Safe Deposit & Trust Co. - — 102Illustrative Material — — .— — 107

B. Interests Arising at Death — 1 — - 109Connecticut Bank & Trust Co. v. United State's^-' —- 109Illustrative Material — — — - 111

C. "Property" vs. "Expectancy" - - 113Estate ofBarr v. Commissioner — — —. 113Illustrative Material — — — - 116

D. Bank Deposits, Checks, and Notes —- — 118Illustrative Material —- - — — 118

E. Right to Accrued Payments — — — 121Illustrative Material —- : - 121

CHAPTER 13 The Scope of the Gift Tax: §§ 2501 and 2511 - 124

A. Is There a "Transfer" of "Property"? - —- 1251. Compensation-Free Services —- — l 125

Commissioner v. Hogle — - - 125Illustrative Material - - 127Revenue Ruling 66-167 —- — — 128Illustrative Material —- - —. 130

2. Interest-Free Loans and Rent-Free Use of Other Assets 130Dickman v. Commissioner —- .— - 131Illustrative Material- - — — 140

B. When is the Transfer "Completed"? - — 1431. Executory Agreements to Transfer — - - 143

Commissioner v. Estate of Copley — - — 143Revenue Ruling 98-21 —- — - — 150Illustrative Material-- — — — 152

2. Transferred Interest Incapable of Valuation — - - 156Estate of DiMarco v. Commissioner—. . — 156Illustrative Material —- 162

3. Indirect Transfers -—- — — —- 163Hey en v. United States — - 163Illustrative Material - - - - 165

C. What is a "Gift"? 1651. Donative Intent and "Adequate and Full Consideration" —- 165

Commissioner v. Wemyss ~ - — 165Illustrative Material —- — 168

2. Political Contributions —- — —- 173Illustrative Material —- - 173

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CHAPTER 14 Transfers of Property in Satisfaction ofMarital Rights: Estate and Gift Taxes 177

A. Dower and Curtesy Interests in the Gross Estate 177Illustrative Material 177

B. Marital Rights as Consideration-- 178Merrill v. Fahs 178Illustrative Material 181

C. Transfers Incident to Separation and Divorce 183Harris v. Commissioner I — - " 184Illustrative Material 189

PART III Composition of the Tax Base: Specific Transfers 201

CHAPTER 15 Transfers with Retained Powers and Rights 202

A. Background and Statutory Framework of §§ 2036-2038 202B. Transfers with Retained Life Estates: § 2036 204

1. Transfers Covered By § 2036: In General 205a. The Elements of § 2036 205

Estate ofNicol v. Commissioner 205Illustrative Material 208

b. Who Is the Transferor?: Reciprocal Trusts 212United States v. Estate of Grace 212Illustrative Material 217

2. Retention of Right to Income from the Property: § 2036(a)(l) - 219Cain v. Commissioner 219Illustrative Material 220

3. Retention of Possession or Enjoyment of the Property:§§ 2036(a)(l) and 2036(b) 223

a. In General - 223Estate of Linderme v. Commissioner 223Illustrative Material 226

b. Retained Voting Rights - 227United States v. Byrum, Executrix 227Illustrative Material 232

4. Retention of Power to Designate Who Shall Possess or Enjoythe Property: § 2036(a)(2) 234

a. In General 234United States v. O'Malley 234United States v. Byrum, Executrix 237Jennings v. Smith 242Illustrative Material 246

CHAPTER 16 Transfers with Retained Powers to Alter,Amend, Revoke, or Terminate: § 2038 255

Lober v. United States 255Illustrative Material 257

TABLE OF CONTENTS XIX

CHAPTER 17 Transfers with Retained Reversionary Inter-ests: § 2037 - - 269

A. Operation of § 2037 - — — 270Estate ofThacher v. Commissioner — 270Illustrative Material —- — 272

B. Policy Considerations for §§ 2036-2038 —- 275U.S. Treasury Department, Tax Reform for Fairness, Simplicity,

and Economic Growth - —> — 275Illustrative Material - —- 277

CHAPTER 18 The "Adequate and Full Consideration" Ex-ception for §§ 2036-2038 — 279

Estate of D'Ambrosio v. Commissioner — — 279Illustrative Material - — —- — 292

CHAPTER 19 Gift Tax Effects of Transfers with RetainedInterests or Powers - — 299

A. Transfers with Retained Powers - 299Estate ofSanford v. Commissioner — j . — 299Camp v. Commissioner — 303Illustrative Material -~ - 309

B. Transfers with Retained Interests — 314Smith v. Shaughnessy — — — — 314Illustrative Material - - — —- 317

CHAPTER 20 Annuities and Employee Benefits - 320

A. The Scope of § 2039 - — 321Estate of Schelberg v. Commissioner — - 321Illustrative Material - — - - 330

B. The Treatment of Employee Benefits Under Other Code Provi-sions — — - 335

Illustrative Material - —- -— - 335

CHAPTER 21 Joint Interests in Property — - 338

A. Estate Tax — - - - 3391. Non-Spousal Joint Tenancies - —- 340

Illustrative Material — —- — 3402. Determining the Tenant's Contributions - —- 341

Estate of Goldsborough v. Commissioner — 342Illustrative Material — — 344

x x TABLE OF CONTENTS

A. Estate Tax—Continued3. Joint Tenancies Between Spouses — 347

Senate Finance Committee Report, Economic Recovery Tax Actof 1981 —- —- 347

Illustrative Material 3484. Relationship of § 2040 to Other Sections - — 348

Illustrative Material — 3485. Community Property — 350

Illustrative Material 350B. Gift Tax-— i.....——- 350

Illustrative Material 350C. Estate Planning Aspects of Jointly Owned Property- 353

CHAPTER 22 Powers of Appointment - 355

A. An Overview of Powers of Appointment - 355B. Estate Taxation of Powers of Appointment 356

1. Introduction — 3562. Section 2041(a)(2): Post-October 21, 1942 Powers 359

Estate ofKurz v. Commissioner — — 359Illustrative Material — 362

3. Section 2041(a)(l): Pre-October 21, 1942 Powers — 372C. Gift Taxation of Powers of Appointment 372

1. Creation of Powers of Appointment---- 3722. Gift Tax Effect of Exercise, Release or1 Lapse of General

Powers of Appointment---- —- —- — 373Illustrative Material - 374

3. Gift Tax Effect of Exercise of Special Powers of Appointment — 376

CHAPTER 23 Life Insurance 377

A. Estate Tax Treatment of Life Insurance 3771. "Insurance Under Policies on the Life of the Decedent" 378

Illustrative Material 3792. Proceeds "Receivable by the Executor" — 3803. Proceeds Receivable by Beneficiaries Other Than the Executor

of the Decedent —- - 381a. Incidents of Ownership Possessed by a Decedent 381

Commissioner v. Estate of Noel — 381Illustrative Material: — — 383

b. Incidents of Ownership Possessed by a Decedent in a Fidu-ciary Capacity — 390

Rev. Rul. 84-179 —- — 390Illustrative Material — 393

c. Incidents of Ownership Possessed by a Decedent Through aControlled Corporation 395

Estate of Levy v. Commissioner 395Illustrative Material — 402

4. Taxation of Life Insurance Proceeds Under Provisions OtherThan § 2042 —- 407

Illustrative Material 407

TABLE OF CONTENTS x x i

B. Gift Tax Treatment of Life Insurance 4101. Gifts of Insurance on the Life of the Donor 410

Illustrative Material- 4112. The Valuation of Life Insurance Policies 413

United States v. Ryerson 413Illustrative Material---- - - 414

3. Life Insurance and Estate Planning 416

CHAPTER 24 Transfers Made Within Three Years of Death — 418

A. Historical Background - 418B. Technical Aspects of § 2035 - - 421

1. Section 2035(a) — — 4212. Amount Includible : 421

Estate ofDeWitt v. Commissioner- — 4223. Section 2035(b) - - — 424

Technical Advice Memorandum 9729005 ~ 425Illustrative Material--- - - - 427Estate of Sachs v. Commissioner - - 428Illustrative Material 431

CHAPTER 25 Disclaimers 434

A. Disclaimers in General 1 434House Ways and Means Committee Report Estate and Gift Tax

Reform Act of 1976 - - 434Illustrative Material - 436

B. Disclaimers in Situations Involving Joint Tenancies and Powers ofAppointment 441

Notice of Proposed Rulemaking Disclaimer of Interests and Pow-ers - 441

Treasury Decision 8744 Disclaimer of Interests and Powers .— 442Illustrative Material 442

C. Policy Aspects of Disclaimers-- - 443

PART IV Exclusions, Deductions, and Credits Necessary toDefine the Tax Base - 445

CHAPTER 26 The Gift Tax Annual Exclusion: Resolution ofAdministrative Problems of Taxing Small Transfers 446

A. Present Interests Versus Future Interests—In General 448Maryland National Bank v. United States 448Illustrative Material ~ 453

B. Gifts to Minors 4601. Section 2503(b)(l) - 460

a. Non-Trust Gifts to Minors 460Revenue Ruling 54-400 - - - 460Illustrative Material 461

XXll TABLE OF CONTENTS

B. Gifts to Minors—Continuedb. Gifts in Trust for Minors —- 462

Crummey v. Commissioner 462Estate of Cristofani v. Commissioner 468Illustrative Material —. 472Estate ofKohlsaat v. Commissioner — 473Illustrative Material 475

2. Section 2503(c) 479Commissioner v. Herr 480Illustrative Material 481Commissioner v. Estate ofLevine 481Illustrative Material 485

C. Policy Issues 487D. Transfers for Tuition or Medical Expenses - 488

House Ways and Means Committee Report, Tax Incentive Bill of1981 488

Illustrative Material - 489

CHAPTER 27 Estate Tax Deductions Necessary to Define theNet Transfer 491

A. The Role of State Law 492Estate ofMillikin v. Commissioner 492Estate ofMillikin v. Commissioner 500Illustrative Material J. 503

B. Specific Deductions 5041. Funeral Expenses-- 504

Illustrative Material 5052. Administration Expenses 505

Illustrative Material 5053. Claims Against the Estate 512

Estate of McMorris v. Commissioner 512Illustrative Material 518

4. Taxes —- 5205. Unpaid Mortgages or Other Indebtedness - 5226. Deductions in Community Property States — 523

CHAPTER 28 The Unified Transfer Tax Credit 525

House-Senate Conference Committee, Economic Growth and Tax Re-lief Reconciliation Act of 2001 — ---- 525

Illustrative Material 526

PART V Other Deductions and Credits — 531

CHAPTER 29 The Deduction for Charitable Contributions .— 532

A. Outright Transfers to Charity 532

Rev. Rul. 67-325 532Illustrative Material 536

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TABLE OF CONTENTS xxiii

B. Split-Interest Transfers to Charity.-- — - - - 543Illustrative Material - - - — - 543

C. Policy Issues - - - — - — — 548Factors Affecting Charitable Giving: Inferences from Estate Tax

Returns, 1986 — — —- - — —- 548Illustrative Material - - - - - - —. 551

CHAPTER 30 Other Tax Credits 552i

A. The Credit for Tax on Prior Transfers -—— .__ _ 552Illustrative Material.— - - - — — - 552

B. The State Death Tax Credit - — - - - 559Illustrative Material - - - - - — 559

CHAPTER 31 Tax Expenditures in the Wealth TransferTaxes- —~ 561

A. The Tax Expenditure Concept - - - - 561B. Definition of "Tax Expenditure" - - - — 562C. Wealth Transfer Tax Expenditures by Budget Function — 563

Illustrative Material - — - - — — — 565

PART VI The Taxable Unit — - - —- - > 571

CHAPTER 32 The Marital Deduct ion— - - - 572

A. Introduction-- — - - — - - - 572

Illustrative Material - - — — - — — 573B. The Estate Tax Marital Deduction - — - - — 574

1. The Statutory Structure.— - - —- - 5742. Interest Passing to the Surviving Spouse - - - 576

Illustrative Material - - - - 5763. The Terminable Interest Rule - - - —. 579

a. The Statutory Scheme—- - - — —- 579b. Disqualification Under the "Terminable Interest" Rule 582

Jackson v. United States — -- 582Illustrative Material - - — - - - 585

c. Exceptions--- — - - — - - - 586(1) Common Disaster and Six-Month Survivorship - - - - - 586(2) Life Estate with Power of Appointment in Surviving

Spouse - - - - - — 587(3) Estate Trust- - - — —- —- 588

Illustrative Material - - - - - 588(4) Life Insurance, Annuity, and Endowment Proceeds

with Power of Appointment in Surviving Spouse 589

xxiv TABLE OF CONTENTS

B. The Estate Tax Marital Deduction—Continued(5) Qualified Terminable Interest Property 590

House Ways and Means Committee Report, Tax Incen-tive Act of 1981 — 591

(a) Income Requirements 594Estate of Shelfer v. Commissioner — 594Illustrative Material - — 599

(b) Powers of Appointment 600Estate of Clack v. Commissioner 600Illustrative Material - 602

(c) Other Technical Requirements - 603Illustrative Material —- 603Revenue Ruling 98-8 606Illustrative Material - 609

(6) Charitable Remainder Trust with Life Estate in Surviv-ing Spouse 610

Illustrative Material - — 6104. Valuation of Interest Passing to Surviving Spouse 611

United States v. Stapf 611Illustrative Material 615Commissioner v. Estate of Hubert 615Illustrative Material 626

5. Types of Marital Deduction Bequests 628a. Introduction 628b. Considerations in Selecting the Form of a Marital Bequest ~ 629

Polasky, Marital Deduction Formula iClauses in EstatePlanning—Estate and Income Tax Considerations 629

Revenue Procedure 64-19 634Illustrative Material 635

C. The Gift Tax Marital Deduction —- 637D. Split Gifts 638E. Planning Considerations 640

1. Objectives of Estate Planning — 6402. The Economics of Tax Minimization - 6413. Techniques to Achieve Marital Deduction Objectives 6424. The Task of the Estate Planner 644

F. Policy Issues 645Illustrative Material - 645

PART VII The Taxation of Transfers from Generation toGeneration - - 647

CHAPTER 33 The Generation-Skipping Tax and the Creditfor Tax on Prior Transfers — 648

A. The Concept of Periodicity in a Transfer Tax 6482. The Tax Reform Acts of 1976, 1986, and 2001 — 653

B. Transfers Subject to the GST Tax —- 6531. The Direct Skip 6542. The Taxable Termination 6553. The Taxable Distribution - 655

Illustrative Material 656

TABLE OF CONTENTS XXV

C. Exceptions to Generation-Skipping Transfers - - 6581. Direct Skips- - — - —- - - — 6582. Taxable Terminations- — — - - — - 6593. Taxable Distributions —- - — — - - 660

D. Calculating the GST Tax -— — — — — —- 6601. Direct Skips— — — — — — -— — 6602. Taxable Terminations--- - - - - - - 6623. Taxable Distributions - — - - — 663

E. The GST Exemption and the Applicable Rate —- — —. 6631. Overview — —- — .'...1.7.7... 6632. Allocation of the GST Exemption - - - — 6643. The Applicable Rate- — — - - - - 666

Illustrative Material-- —- — - - - 667F. Interrelationships of GST Tax with Estate, Gift and Income Taxes 669

1. In General-- — — — —- - — — 6692. Planning Considerations — — —- — — 670

G. Effective Date Rules— — — — - - —- 671H. Policy Issues — —- — — — — 671

1. Evaluation of the Generation-Skipping Tax - — 671a. The Level of Transfers at Which the Tax Should Apply - 671b. Generation-Skipping Taxable Events — - 672c. Tax Base and Tax Rates — — — —- —- 674

PART VIII Valuation- — - — — - - t 675

CHAPTER 34 Time of Valuation — - - — 676

A. The Valuation Date- —- — - — —- — - 676

1. Estate Valuation of Property Transferred Inter Vivos 677a. Disposition of Donated Property . . - - 677

2. Value of Property Affected by Event of Death—- - — 6783. Alternate Valuation Date — - — 680

Illustrative Material-- ,. — — 682CHAPTER 35 Valuat ion Methods - — - — - - 687

A. Valuation of Business Interests-- — -—•- — 6871. Valuation of Stock in General - —- — — — - 687

Rev. Rul. 59-60- —- —- — — — — - 687Illustrative Material--- — — — — 693

2. Size of Holding as Affecting Fair Market Value---- — — 697a. The Blockage Doctrine — — — — — 697

Helvering v. Maytag — — - - 697Illustrative Material — — - . - 700

b. Minority Discounts — - - - - 702Estate of Bright v. United States - — - - — 702Revenue Ruling 93-12 - — - - 710Illustrative Material - —- - — - - - 712

XXVI TABLE OF CONTENTS

B. Valuation of Real Property - 719Revenue Procedure 79-24 719Illustrative Material — 721

C. The Use of Mortality and Interest Tables in Valuation —- 723Illustrative Material 725

CHAPTER 36 Impact of Buy-Sell Agreements, LapsingRights and Liquidation Restrictions on Valuation 728

v _____

A. Restrictive Transfer Agreements 7281. Types of Agreements - 729

a. First Offer Agreements-— 729b. Option Agreements 729c. Binding Agreements 730

2. Section 2703 730Estate ofLauder v. Commissioner 7301990 Senate Report on Proposed Revision of Estate Freeze

Rules - 744Illustrative Material 746

3. Judicial Requirements 750a. Necessity of Enforceable Agreement 751b. Necessity That Agreement Bind Both During Life and After

Death i — 751B. Lapsing Rights and Restrictions on Liquidation: § 2704 —- 752

1990 Senate Report on Proposed Revision of Estate Freeze Rules — 752Conference Report on H.R. 5835, The Omnibus Budget Reconcilia-

tion Act of 1990 — 753Illustrative Material 754

CHAPTER 37 Estate Freezes - - 758

A. Special Valuation Rules for Certain Interests in Corporations andPartnerships: § 2701 759

1990 Senate Report on Proposed Revision of Estate Freeze Rules ---- 759Illustrative Material 766

B. Special Valuation Rules for Trusts and Term Interests: § 2702 —- 7701990 Senate Report on Proposed Revision of Estate Freeze Rules .... 770Illustrative Material 773

PART Di Administrative Aspects of Wealth Transfer Taxes.... 779

CHAPTER 38 Tax Responsibilities of the Executor - 780

A. Liquidity Problems 781

1. Extensions of Time to Pay the Tax — 7812. Payment of Tax in Installments 7823. Redemption of Stock to Pay Estate Taxes and Expenses 784

TABLE OF CONTENTS xxvii

A. Liquidity Problems—Continued4. Family Farms and Small Businesses —- — —- - 786

Staff of the Joint Committee on Taxation, General Explanationof the Tax Reform Act of1976—- — — — 786

Gutman, Reforming Federal Wealth Transfer Taxes AfterERTA - - - 787

Illustrative Material - —- — - — - - 7905. Planning for Estates with Illiquid Assets - — — 7936. Policy Issues - ->- — — — - 793

Chason & Danforth, The Proper Role of'the Estate and GiftTaxation of Closely Held Businesses - — —- — - 794

Gutman, Reforming Federal Wealth Transfer Taxes AfterERTA —- — — 795

B. Post-Mortem Estate Planning — — - 796Browne, Effect of Elections by an Executor Upon the Estate and

Upon the Beneficiaries — —- — — —- - 797C. Personal Liability of the Executor---- — — — — 800

Singleton v. Commissioner - —- — — - .— - 800Illustrative Material - —- — -— — 804Report of Committee on Tax Aspects of Decedents' Estates, Liability

of Fiduciaries and Transferees for Federal Estate and Gift Taxes 804D. Ethical Problems Involved in the Administration of Estates 806

Report of the Special Task Force on Formal Opinion 85-352 —. 811Regulations Governing Practice Before the Internal Revenue Ser-

vice — —- — — - -- -—- 816Treasury Department Circular No. 230- - - - —- 818Illustrative Material — — — —- — — 820

PART X International Aspects of Wealth Transfer Taxation — 823

CHAPTER 39 U.S. Jurisdictional Principles - - 824

A. Citizenship — —- — - — — — 824

Illustrative Material - - — 824B. Expatriation to Avoid U.S. Wealth Transfer Taxes— —- —- 825

Report of the House Ways and Means Committee —. — 825Illustrative Material —- —- —- — 828

C. Domicile-— -— — —- - — —- — —- 829Revenue Ruling 80-209— —- — — —- — — 830Illustrative Material — - - — —- 832

D. Situs Rules— - - - - — - - —- 832Illustrative Material — - — — — — 833

CHAPTER 40 The Foreign Tax Credit — - - — 838

Estate of Schwartz v. Commissioner — — — — — -- 839Illustrative Material — — — — — — —- 844

xxviii TABLE OF CONTENTS

CHAPTER 41 Transfer to a Non-Citizen Spouse 846

House Budget Committee Report on the Omnibus Reconciliation Act of1989 - — - — 846

Illustrative Material — — 850

CHAPTER 42 Transfers by Non-Resident Aliens 853

Illustrative Material — — - 853

CHAPTER 43 Wealth Transfer Tax Treaties 856

Illustrative Material — — 856

APPENDIX - — —- 861INDEX —- - — - - - 863