ESTATE OF MAXWELL V. COMMISSIONER


PROCEDURAL POSTURE: Petitioners, estate and executors, appealed from a decision entered in the United States Tax Court affirming the assessment of tax deficiencies by respondent Commissioner of Internal Revenue against the estate on grounds that the conveyance of decedent's personal residence during her life constituted a transfer with retained life estate within the meaning of 26 U.S.C.S. § 2036.

FACTS: About two years before her death, decedent transferred ownership of her house to her son and his wife. Along with the transfer, the parties agreed that decedent would continue to live in the house, but would pay rent to her son. The son agreed to pay certain expenses associated with the property. Decedent's son paid $270,000 for the property, executing a mortgage note in decedent's favor. Evidence indicates mat decedent did not make regular rental payments to her son, and mat the son did not make regular payments on the mortgage. Further, mere was evidence mat neither party intended for the mortgage to be paid. The decedent reported the sale of the house on her income tax return, but did not pay tax on it. After decedent's death, her son sold the house for $550,000. On decedent's estate tax return, the estate (P) reported only the amount outstanding on the mortgage note. The IRS found mat the transaction constituted a transfer with a retained life estate, not a bona fide sale, and assessed a deficiency against the estate to adjust for the difference between the fair market value of the house and the amount of the mortgage note. P appealed to Tax Court, which affirmed the IRS. P appeals again.

ISSUE: Is property which a decedent transferred away for less man market value, and in which she retained a right of possession taxable to the decedent's estate?

HOLDING: The decedent conveyed her personal residence to her son and his wife pursuant to a mortgage and lease agreement. Following the transfer, the decedent continued to reside in the house until her death. Respondent Commissioner of Internal Revenue assessed tax against petitioners, estate and executors, for the value of the house. Under I.R.C. § 2036(a), where property was disposed of by a decedent during her lifetime but the decedent retained "possession or enjoyment" of it until her death, that property was taxable as part of the decedent's gross estate, unless the transfer was a bona fide sale for an "adequate and full" consideration. 26 U.S.C.S. § 2036. The tax court affirmed the assessment, and on subsequent review, the court determined the decedent had retained a life estate in the property. The transfer was not a bona fide sale because decedent's "rent" payments were almost equal to the mortgage interest, and there was no indication the deceased had intended to collect on the mortgage principal. The court determined that, at the time of the transaction, there was no real expectation of the intent to enforce collection of the mortgage.

OUTCOME: The decision of the tax court affirming respondent Commissioner of Internal Revenue's assessment of tax deficiencies against petitioners, estate and executors, was affirmed because the conveyance of the decedent's property was not a bona fide sale for an adequate and full consideration in money or money's worth. The decedent retained possession or enjoyment of the property following the transfer and did not intend to collect on the mortgage.