## Facts

- Samuel C. Sachs died on June 27, 1980.
- In 1978, within three years of death, Sachs and his wife transferred closely held stock (about $2.4 million) to three irrevocable trusts for their grandchildren.
- The transfers were structured as “net gifts,” requiring the donee trusts (through their trustees) to pay the gift tax attributable to the transfers as a condition of receiving the gifts.
- The donee trusts paid gift tax of roughly $600,000+; neither Sachs nor his estate paid the gift tax.
- On the estate tax return, the estate included the transferred stock in the gross estate under the three-year inclusion rule, but reduced the amount included by the gift tax paid by the trusts.
- The Commissioner determined an estate tax deficiency by including in the gross estate the amount of gift tax the trusts paid, asserting inclusion was required by I.R.C. § 2035(b).
- The estate petitioned the United States Tax Court to contest the deficiency.

## Issues

1. Whether I.R.C. § 2035(b) requires inclusion in a decedent’s gross estate of gift tax paid by donees (donee trusts) on net gifts made within three years of death, when the statute refers to gift tax “paid by the decedent or his estate.”
2. Whether the income-tax treatment of donee-paid gift tax under the net gift doctrine supports treating such tax as “paid by the decedent” for purposes of § 2035(b).

## Decision

- The Tax Court held for the estate.
- Section 2035(b) did not require inclusion in the gross estate of gift tax paid by the donee trusts because the tax was not paid by the decedent or the estate.
- The court declined to extend § 2035(b) beyond its stated text based on economic equivalence arguments or generalized anti-avoidance purpose.

## Legal Principles

- For § 2035(b) inclusion, the relevant trigger is actual payment of gift tax by the decedent or the decedent’s estate; donee payment is outside the statutory phrase “paid by the decedent or his estate.”
- Income-tax consequences of a net gift transaction (including treatment of donee-paid gift tax as income to the donor under net gift doctrine case law) do not control the estate-tax inclusion rule under § 2035(b).
- Courts will not expand a transfer-tax inclusion provision beyond its limiting statutory language based solely on perceived legislative purpose; any broader coverage must come from Congress.

## Conclusion

The Tax Court interpreted § 2035(b) according to its limiting text and held that gift tax paid by donee trusts under a net gift arrangement was not includible in the decedent’s gross estate because it was not paid by the decedent or the estate.


Estate of Sachs v. Commissioner, 88 T.C. 769 (1987)