Estate of Maxwell v. Commissioner,
3 F.3d 591 (1993).


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 that decedent did not make regular rental payments to her son, and that the son did not make regular payments on the mortgage. Further, there was evidence that 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 that 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.


Issues:
(i) Did T retain possession or enjoyment of the property following the transfer?
(ii) If she did, was the transfer a bona fide sale for an adequate and full consideration in money or money's worth?

B]Rule:[/B]Possession or enjoyment is retained when there is an express or implied understanding to that effect among the parties to the transfer.


Holding: (i) Yes. (ii) No. Judgment affirmed.
The Tax Court, affirmed assessment. Estate appealed. The Court of Appeals, District Judge, sitting by designation, held that mother's transfer of personal residence to son was a transfer with a retained life estate requiring assessment of deficiency against estate to adjust for difference between fair market value of property at time of death and amount reported on state tax return.

Analysis: 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.