Decedent did not retain possession and enjoyment of entire property.

• Author: Beavers, James A.

The Second Circuit held that the Tax Court clearly erred in finding that the terms of an implied agreement between a decedent and her son provided that the decedent would retain enjoyment of the entirety of a 49% share in a Manhattan brownstone that she had given to the son and that the entire property should remain in the estate.

Background

Since 1989, Margot Stewart and her adult son Brandon Stewart co-owned, as joint tenants with rights of survivorship, a house in East Hampton, New York (the East Hampton property). Each summer, Margot and Brandon rented out the property, splitting the rental income evenly. They also split evenly the expenses of maintaining the property. The result was that every summer Margot and Brandon each received half of the East Hampton property's net income.

Margot and Brandon lived on the first two floors of a five-story brownstone in Manhattan (the Manhattan property), which Margot had bought in 1968. On October 1,1999, Margot leased the upper three floors to an unrelated commercial tenant, Financial Solutions, Ltd. The rent was $9,000 per month, and the term ran through July 31, 2002.

Margot was diagnosed with pancreatic cancer in December 1999, and she began chemotherapy treatments in January 2000. On May 9, 2000, Margot and Brandon signed a deed that transferred a 49% interest in the Manhattan property to Brandon. Although she made the gift after she was diagnosed with cancer, Margot had discussed the gift with Brandon and an estate planner before the diagnosis. The deed provided that Margot and Brandon would be tenants in common.

After the gift was completed, Margot and Brandon continued to live together in the lower two floors of the Manhattan property. Financial Solutions continued to rent the upper three floors, but its rent payments were erratic, untimely, and sometimes partial. In addition, the Manhattan property underwent thousands of dollars worth of repairs. As a result, the Manhattan property expenses were significantly higher than usual, at the same time that the income produced by the property became unreliable.

The financial relationship between Margot and Brandon underwent several significant changes during the period after the gift and before Margot's death. While Margot continued to receive the Manhattan property rent payments from Financial Solutions, Brandon, who was receiving the rent from in the East Hampton property, stopped sharing it with Margot. Brandon also paid a small amount of the...