## Facts

- In 1955, M. Lee Gallenstein and her husband purchased a Kentucky farm for $38,500 and held title as joint tenants with right of survivorship.
- The purchase price was paid entirely from the husband’s earnings.
- The husband died on December 12, 1987; the taxpayer became sole owner by survivorship.
- On July 5, 1988, the taxpayer sold 73.6 acres for $3,663,650, with $800,000 received in 1988 and the remainder payable over five years.
- The taxpayer filed an original 1988 return reporting a large capital gain; she later filed amended returns seeking increased basis, culminating in a position that a full stepped-up basis eliminated gain.
- The IRS accepted the first amended return but denied the second, which depended on 100% inclusion of the property’s value in the husband’s gross estate.
- The taxpayer filed a refund suit in the Eastern District of Kentucky and prevailed; the United States appealed on a pure question of statutory interpretation.

## Issues

1. Whether I.R.C. § 2040’s 1976 spousal “50% rule” applies to spousal joint tenancies created before January 1, 1977.
2. If the 50% rule does not apply, whether § 2040’s pre-1976 contribution rule requires inclusion of 100% of the property’s value in the decedent’s gross estate when the decedent furnished all consideration.
3. Whether the 1981 amendments to § 2040(b) impliedly repealed the 1976 effective-date limitation and extended the 50% rule to pre-1977 joint interests.

## Decision

- The Sixth Circuit affirmed the district court’s judgment for the taxpayer.
- The court held the 1976 spousal 50% rule applies only to qualifying joint interests created after December 31, 1976.
- Because the joint tenancy was created in 1955, the contribution rule governed.
- Since the decedent provided all consideration, 100% of the farm’s value was includable in his gross estate.
- The taxpayer was therefore entitled to a stepped-up basis in 100% of the property, supporting the claimed refund.

## Legal Principles

- The effective-date clause limiting § 2040(b)’s spousal 50% rule to post-1976 joint interests controls absent clear congressional action to the contrary.
- For spousal joint tenancies created before January 1, 1977, § 2040’s contribution rule applies; estate inclusion tracks the decedent’s contribution to acquisition cost.
- When the decedent furnished all consideration for a pre-1977 spousal joint tenancy, the decedent’s gross estate includes 100% of the property’s value.
- Courts disfavor implied repeal; later amendments will not be read to nullify an earlier effective-date limitation without a clear statutory command.
- Full estate inclusion under the contribution rule supports a full stepped-up basis in the property for the surviving spouse.

## Conclusion

The Sixth Circuit held that a spousal joint tenancy created in 1955 remained subject to § 2040’s contribution rule, requiring inclusion of the entire property value in the decedent’s estate where the decedent paid the full purchase price, and entitling the surviving spouse to a stepped-up basis for 100% of the property and the corresponding income-tax refund.


Gallenstein v. United States, 975 F.2d 286 (6th Cir. 1992)