## Facts

- Rose D’Ambrosio owned 470 preferred shares of Vaparo, Inc. valued at $2,350,000.
- In 1987, at age 80, she retained a life income interest in the shares but transferred the remainder interest to Vaparo in exchange for a private annuity of $296,039 per year.
- The parties stipulated that the annuity’s fair market value, $1,324,014 under Treasury actuarial tables, equaled the fair market value of the remainder interest transferred.
- D’Ambrosio died in 1990 after receiving $592,078 in annuity payments and $23,500 in dividends.
- The estate did not include any interest in the Vaparo shares in the gross estate.
- The Commissioner issued a deficiency notice asserting that, under 26 U.S.C. § 2036(a)(1), the estate had to include the full value of the Vaparo shares at death ($2,350,000), reduced by annuity payments received.
- The Tax Court upheld the deficiency and treated the arrangement as abusive, relying principally on cases requiring consideration measured against fee simple value.
- The estate appealed to the Third Circuit.

## Issues

1. Whether § 2036(a)(1) requires inclusion of the fee simple value of property at death when the decedent retained a life income interest but sold the remainder interest for its full stipulated fair market value.
2. Whether the “adequate and full consideration” exception in § 2036(a) is satisfied when the consideration equals the fair market value of the specific interest transferred (the remainder), rather than the fee simple value of the underlying property.
3. Whether actual annuity payments received before death, as opposed to actuarial value at the time of transfer, affect the § 2036(a) analysis.

## Decision

- The Third Circuit reversed the Tax Court.
- The court held that § 2036(a)(1) did not bring the shares’ full fee simple value back into the gross estate because the remainder interest was transferred for adequate and full consideration.
- The court treated the relevant “transfer” as the transfer of the remainder interest and accepted the parties’ stipulation that the annuity equaled that remainder’s fair market value.
- The court rejected an approach that effectively required consideration equal to the property’s fee simple value to avoid § 2036 inclusion.
- The case was remanded with instructions to enter judgment for the estate.

## Legal Principles

- Section 2036(a)(1) applies when a decedent transfers an interest in property while retaining possession, enjoyment, or the right to income for life, unless the transfer was for “adequate and full consideration in money or money’s worth.”
- For purposes of the § 2036 exception, “adequate and full consideration” is measured against the fair market value of the particular interest transferred, not necessarily the fee simple value of the underlying property.
- A stipulation that the consideration’s fair market value equals the fair market value of the transferred interest bars the government from claiming the transfer lacked adequate and full consideration on a valuation-shortfall theory.
- The adequacy of consideration under § 2036 is assessed at the time of the transfer; later events, including the transferor’s early death and resulting payment shortfall relative to actuarial value, do not retroactively create estate inclusion under § 2036(a)(1).

## Conclusion

Because the decedent sold the remainder interest in the stock for its full stipulated fair market value while retaining only a life income interest, the § 2036(a) adequate-and-full-consideration exception applied, and the stock’s fee simple value was not includible in the gross estate under § 2036(a)(1).


Estate of D’Ambrosio v. Comm’r, 101 F.3d 309 (3d Cir. 1996)