## Facts

- Margot Stewart owned a five-story Manhattan brownstone, living with her son Brandon on the first two floors while the top three floors were leased to an unrelated commercial tenant.
- In 2000, Stewart gifted Brandon a 49% undivided interest in the brownstone as tenants in common, retaining 51%.
- After the gift, Stewart and Brandon continued to co-occupy the residential portion of the property.
- The commercial tenant later paid rent inconsistently, but when rent was paid Stewart received all rental income and Brandon received none directly.
- After the gift, Brandon paid a small but nontrivial portion of the building’s expenses; before the gift he did not contribute.
- On Stewart’s death, the estate reported only Stewart’s retained 51% interest in the gross estate.
- The IRS asserted a deficiency, claiming 100% of the property was includible under I.R.C. § 2036(a)(1) based on Stewart’s retained possession/enjoyment or right to income.
- The Tax Court found an implied agreement that Stewart would continue to enjoy the economic benefits of the 49% interest and held the entire property includible.
- The estate appealed, disputing both the existence and the scope of any implied retained interest.

## Issues

1. Whether an implied agreement existed such that Stewart retained for life “possession or enjoyment” of, or “the right to the income from,” the interest she transferred, triggering I.R.C. § 2036(a)(1).
2. Whether, if § 2036(a)(1) applied, it required inclusion of 100% of the brownstone’s value, or only the portion corresponding to any retained enjoyment or income rights.

## Decision

- The court affirmed the Tax Court’s finding that an implied agreement existed supporting retained enjoyment of at least some portion of the transferred interest.
- The court held the Tax Court clearly erred by treating the implied agreement as extending to the entire 49% transferred interest and thereby including 100% of the property.
- The court vacated and remanded for a determination of what portion, if any, of the transferred 49% interest was subject to inclusion under § 2036(a)(1), with attention to differences between residential use and rental-income components.

## Legal Principles

- I.R.C. § 2036(a)(1) includes in the gross estate property transferred during life if the decedent retained for life the possession or enjoyment of, or the right to income from, the property.
- A retained-interest finding may be based on an implied agreement inferred from post-transfer conduct, including continued occupancy and continued receipt of income.
- Application of § 2036(a)(1) is not necessarily all-or-nothing; inclusion can be limited to the portion of the transferred interest as to which the decedent actually retained possession, enjoyment, or income rights.
- Courts must make a fact-specific assessment of the scope of any retained enjoyment, including separating distinct components of a mixed-use asset (e.g., residential occupancy versus rental-income benefits).

## Conclusion

The Second Circuit held that while evidence supported an implied retained-interest arrangement under § 2036(a)(1), the record did not justify including 100% of the property; the case was remanded to quantify any includible portion of the transferred interest based on the decedent’s actual retained enjoyment or income rights.


Estate of Stewart v. Commissioner, 617 F.3d 148 (2d Cir. 2010)