## Facts

- Lydia G. Maxwell owned and lived in a residence in Old Brookville, New York, and continued to do so until her death in 1986.
- In 1984, at age 82 and ill with cancer, she conveyed the residence to her son and daughter-in-law for a stated price of $270,000.
- As part of the transaction, she immediately forgave $20,000 of the price and took back a $250,000 mortgage note secured by the property.
- The transferees leased the home back to her for five years at $1,800 per month and agreed to pay certain carrying costs.
- During 1984–1986, her rent payments were nearly equal to the mortgage interest payments she received from the transferees.
- The transferees made no out-of-pocket principal payments; principal was reduced only through annual $20,000 forgiveness and the remaining balance was canceled by her will.
- After her death, the transferees sold the residence for $550,000.
- The estate tax return treated the remaining mortgage balance as an estate asset; the Commissioner asserted an estate tax deficiency on the ground that the residence’s value was includible in the gross estate under I.R.C. § 2036(a).

## Issues

1. Whether the 1984 conveyance was a transfer under I.R.C. § 2036(a) in which the decedent retained possession or enjoyment of the residence for life through an express or implied agreement.
2. Whether the conveyance qualified for the § 2036(a) exception as a bona fide sale for adequate and full consideration in money or money’s worth.

## Decision

- The Second Circuit affirmed the Tax Court’s determination that the residence was includible in the decedent’s gross estate under § 2036(a).
- The court agreed that the decedent retained possession or enjoyment of the property by implied agreement, notwithstanding the deed, lease, and mortgage documents.
- The court held the transaction was not a bona fide sale for adequate and full consideration because the consideration was not economically real: principal was effectively never intended to be paid and was systematically forgiven.

## Legal Principles

- Under I.R.C. § 2036(a), property transferred during life is included in the decedent’s gross estate if the decedent retained possession or enjoyment of the property for life, unless the transfer was a bona fide sale for adequate and full consideration.
- An implied understanding permitting the transferor to continue exclusive occupancy and enjoyment can satisfy § 2036(a), even when the arrangement is documented as a sale and leaseback.
- In evaluating the § 2036(a) bona fide sale exception, courts examine economic substance, including whether intrafamily obligations are genuine and enforced, rather than relying on formal labels.
- Regular forgiveness of purchase-money debt and circular payment streams that largely offset (e.g., rent approximating interest) support treating the transaction as testamentary in effect, not an arm’s-length sale.

## Conclusion

The court treated the intrafamily sale-leaseback as a transfer with a retained life estate because the decedent effectively kept lifetime use of the home and the children did not provide economically meaningful consideration, making the residence includible in the gross estate under § 2036(a).


Estate of Maxwell v. Commissioner, 3 F.3d 591 (2d Cir. 1993)