## Facts

- Marie J. Nicol died on September 28, 1965; her daughter, Nancy N. Davis, served as executrix.
- On October 18, 1962, Nicol (age 77) executed a 5-year crop-share lease (renewable for 3 years) of contiguous Montana farm parcels to Davis and Davis’s husband.
- The lease required the tenants to deliver to Nicol, as rent, one-third of all grain grown; Nicol agreed to pay real property taxes and one-third of certain farming-related costs.
- Eleven days after executing the lease, Nicol conveyed the same farm to Davis by general warranty deed in fee simple, with no expressed life estate or other reservation.
- The lease provided it would remain effective even if Nicol later conveyed the farm to Davis.
- After the deed, the tenants continued farming and paying the one-third crop share to Nicol, and Nicol continued performing her lease obligations, until Nicol’s death.
- The estate tax return did not include the farm in the gross estate.
- The Commissioner determined an estate tax deficiency, asserting inclusion of the farm’s full value under I.R.C. § 2036(a)(1) because Nicol retained enjoyment of income from the farm for a period not ending before death.

## Issues

1. Whether the farm’s value was includible in the gross estate under I.R.C. § 2036(a)(1) because, through the lease, the decedent retained possession or enjoyment of, or the right to income from, the transferred property for a period not ending before death.
2. If § 2036(a)(1) applied, whether inclusion should be limited to only the crop-producing portion rather than the entire parcel.

## Decision

- The Tax Court sustained the deficiency and held the full value of the farm was includible in the gross estate under § 2036(a)(1).
- The court treated the lease and subsequent deed as an integrated arrangement that assured the decedent continued enjoyment of income from the property until death.
- The court rejected the argument that § 2036 required an expressly reserved life estate or that the retained right was limited to a fixed lease term in form.
- The court rejected limiting inclusion to only productive acreage, concluding the retained enjoyment related to the entire transferred property covered by the lease and deed.

## Legal Principles

- Under I.R.C. § 2036(a)(1), property is included in a decedent’s gross estate when the decedent transfers property (without adequate and full consideration) but retains for life, or for a period not ending before death, possession or enjoyment of, or the right to income from, the property.
- § 2036 focuses on retained economic enjoyment and income rights in substance, not on whether state-law title passed or whether a traditional life estate was reserved in form.
- A lease or similar contractual arrangement that preserves the transferor’s income stream from transferred property can constitute a retained interest under § 2036(a)(1), including where the arrangement continues in fact until death.
- When the retained enjoyment arises from an arrangement covering the transferred parcel as a whole, inclusion may extend to the entire property subject to the retained enjoyment, not merely the portions generating current income.

## Conclusion

The Tax Court held that a deeded transfer of a farm to a daughter did not remove the farm from the gross estate where the decedent, through a contemporaneous lease arrangement, retained crop-share rental income and related benefits until death; § 2036(a)(1) required inclusion of the farm’s full value.


Estate of Nicol v. Commissioner, 56 T.C. 179 (1971)