## Facts

- Helen DeWitt created an irrevocable trust for the benefit of her son and her grandchildren.
- DeWitt transferred $250,000 in cash to the trust and paid gift tax on the transfer.
- DeWitt and her son served as the trust’s trustees.
- The trustees used the trust cash to fund a commercial note, which became the trust’s main asset.
- DeWitt died less than two years after creating and funding the trust.
- At DeWitt’s death, the trust’s note had declined in value to about $187,500.
- Because the transfer occurred within three years of death, the Estate included the trust property in the gross estate under I.R.C. § 2035 on its estate tax return.
- The Estate reported the includible amount as $187,500, reflecting the note’s fair market value on the date of death.
- The Commissioner determined an estate tax deficiency, asserting that § 2035 required inclusion at $250,000 (the cash value transferred), not the lower death-date value of the note.
- The Estate petitioned the United States Tax Court to redetermine the deficiency and to confirm that the includible amount was $187,500.

## Issues

1. When property is included in the gross estate under I.R.C. § 2035 because it was transferred within three years of death, is the amount included valued at the transfer-date amount or at the property’s fair market value on the date of death under the general estate tax valuation rules?

## Decision

- The Tax Court ruled for the Estate on the valuation question.
- The court held that § 2035 is an inclusion provision and does not set a special transfer-date valuation rule.
- The includible trust property was valued at its fair market value on the date of death (about $187,500), not at the $250,000 originally transferred.
- The Commissioner’s deficiency determination was rejected to the extent it depended on using $250,000 as the includible value.

## Legal Principles

- I.R.C. § 2035 determines whether certain transfers made within three years of death are brought back into the gross estate, but it does not, without explicit statutory direction, change how included property is valued.
- Under I.R.C. § 2031, property included in the gross estate is generally valued at fair market value on the date of death (or, if properly elected, under the alternate valuation rules of I.R.C. § 2032).
- When transferred property is converted into a different form before death (for example, cash transferred to a trust that is later invested in a note), valuation for estate tax purposes focuses on the property held at death and its death-date fair market value, unless a statute clearly requires a different measure.

## Conclusion

Estate of DeWitt v. Commissioner holds that when § 2035 causes recently transferred property to be included in the gross estate, the includible amount is determined under the standard estate valuation framework—fair market value at the date of death—rather than by the value of what the decedent originally transferred.


Estate of DeWitt v. Commissioner, 68 T.C.M. 1136 (1994)