## Facts

- Jean Steinberg, age 89, entered a binding “net, net gift” agreement (Apr. 17, 2007) transferring property to her four daughters with an appraised gross value of about $109 million.
- In exchange, the daughters agreed to assume and pay (1) all federal gift tax generated by the transfers (about $32 million) and (2) any federal and state estate tax arising under I.R.C. § 2035(b) if Steinberg died within three years of the gifts.
- Steinberg reported the gifts by reducing the gross transferred value for (1) the gift tax assumed and (2) the present value of the daughters’ contingent § 2035(b) obligation.
- Using IRS actuarial mortality tables for an 89-year-old and discounting to present value, Steinberg’s expert valued the § 2035(b) obligation at approximately $5.8 million.
- The IRS issued a notice of deficiency disallowing the entire reduction attributable to the contingent § 2035(b) obligation, asserting it was not “consideration in money or money’s worth” and was too speculative to value.
- Steinberg petitioned the Tax Court to redetermine the deficiency.

## Issues

1. Whether, under I.R.C. § 2512(b), the donees’ assumption of a contingent estate-tax liability under I.R.C. § 2035(b) constitutes “consideration in money or money’s worth” that reduces the value of a gift.
2. Whether the contingent § 2035(b) obligation is too speculative to be valued and therefore must be ignored in determining the gift’s value.

## Decision

- The Tax Court held for Steinberg and allowed the reduction in the reported gift value for the present value of the daughters’ assumed § 2035(b) liability.
- The court concluded the daughters’ promise to pay a potential § 2035(b) tax burden was a real economic obligation that a willing buyer would treat as reducing the value of what was received.
- The court rejected the IRS argument that the obligation was too speculative, finding it capable of actuarial valuation using mortality probabilities.
- The deficiency determination was rejected to the extent it depended on disallowing the approximately $5.8 million reduction.

## Legal Principles

- Under I.R.C. § 2512(b), the taxable amount of a transfer is reduced by the value of consideration received in “money or money’s worth,” including liabilities assumed by the transferee that arise from the transfer.
- In valuing transferred property for gift-tax purposes, fair market value is determined from the standpoint of a hypothetical willing buyer and willing seller with reasonable knowledge of relevant facts, including encumbrances and obligations associated with the transfer.
- A donee’s assumption of tax liabilities generated by the transfer can constitute money-or-money’s-worth consideration that reduces the gift’s value.
- Contingent obligations are not disregarded solely because they depend on future events; if reasonably quantifiable (e.g., by actuarial methods), they may be reflected as present-value reductions in valuation.

## Conclusion

The Tax Court recognized that, in a net, net gift, a donee’s actuarially determined assumption of contingent § 2035(b) estate-tax liability is money-or-money’s-worth consideration under § 2512(b) and therefore reduces the value of the taxable gift.


Steinberg v. Commissioner, 145 T.C. 184 (2015)