Third Circuit allows exclusion of asset from gross estate when only remainder interest had been sold.

• Author: Barton, Peter C.

In Est. of D'Ambrosio, 101 F3d 309 (1996), rev'g 105 TC 252 (1995), the Third Circuit ruled that preferred stock was excludible from the gross estate when a decedent had sold only the remainder interest m the stock. Prior cases had required that the entire (fee simple) interest in the property be sold for it to be excludible from the gross estate.

Sec. 2036(a) includes in the gross estate "the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, under which he has retained for his life ... 1. the possession or enjoyment of, or the right to the income from, the property...." If adequate consideration is not received, the transferred property is included in the transferor's gross estate, less the consideration received, under Sec. 2043(a). Sec. 2031 (a) requires the date of death value to be used for the gross estate (unless the alternate valuation date is elected under Sec. 2032). Typical Sec. 2036(a) situations include the decedent giving his residence to relatives but retaining the right to occupy it for life or the decedent giving land or securities to relatives and retaining the right to income for life. In these situations, the assets are included in the decedent's gross estate. (The remainder interest in these examples is the right to receive the assets when the decedent dies.)

In D'Ambrosio, Rose D'Ambrosio and her son owned all of the stock of Vaparo Corporation in 1983. Between 1983 and 1987, Rose gave all of her stock, except for 470 noncumulative preferred shares, to unidentified donees. In 1987, at age 80, she sold the remainder interest in the 470 preferred shares to Vaparo for $1,324,014, which she would receive as an annuity. (This amount was calculated using the actuarial tables under Regs. Sec. 20.2031.) The entire value of the preferred shares was $2,350,000, which left $1,025,986 for the income interest that she retained. When she died in 1990, she had received two annuity payments totaling $592,078. Also, she had received $23,500 in dividends in 1987, but no dividends were paid from 1988-1990. (Since the parties stipulated to these valuations, the Tax Court accepted them. However, the court noted that a life estate in noncumulative preferred stock that paid infrequent dividends might have no value.)

Rose's executrix did not include any...