Estate of Morrissette v. Commissioner
T.C. Memo. 2021-60

On May 12, 2021, the Tax Court issued a Memorandum Opinion in the case of Estate of Morrissette v. Commissioner (T.C. Memo. 2021-60). The primary issue presented in Estate of Morrissette v. Commissioner was whether IRC § 2036 or IRC § 2038 applies to recapture significant inter vivos transfers made as part of the split-dollar agreements, and, if not, whether the special valuation rule of IRC § 2703 applies to require that the valuation disregard a provision in the split-dollar agreements that restricts the parties’ right to unilaterally terminate the agreements.

Initial Clarification in Estate of Morrissette v. Commissioner

The decedent does not, as far as I could discern from my research, bear any relation to the Canadian-American singer-songwriter Alanis Morissette, who known as much for her emotive mezzo-soprano voice as her utter failure to be able to appropriately distinguish between events that are unfortunate and those that are, actually, Ironic.

Estate of Morrissette v. Commissioner

Background to Estate of Morrissette v. Commissioner

The Clara and Arthur Morrissette married in 1933.  Ten years later, Clara told Arthur that he needed to do something with his life, and the proverbial bee having been placed in Arthur’ bonnet, and for $450 he bought a used truck and began a moving company.  While moving others, the moving company, itself, moved on up in the world (whether or not to the East Side is anyone’s guess, the opinion is unclear). Today, Interstate Group Holdings, Inc. (Interstate), comprises 32 companies operating a moving, relocation, and storage business.

Clara and Arthur had three boys—Buddy, Don, and Ken.  The boys worked for Interstate since they were each knee-high to a grasshopper.  (The whole mess of them lived in Virginia, so this Southern colloquialism is not only quaint, but it’s accurate, too, which makes it finer than a frog’s hair split four ways.  I’m done now.) The opinion notes that Arthur was a “boss first and a father second,” so that must have made for fun dinnertime conversation.

In the late 1980s, Arthur considered selling Interstate.  Eventually he changed his mind, but not without ripping the Morrissette clan asunder.  The boys, all in their forties at this point in the story, were also executives at Interstate.  Buddy was Interstate’s CEO and president and was the driving force behind Interstate’s expansion beginning in the 1980s and continuing throughout the 1990s and early 2000s.  The opinion is unclear what positions Don and Ken held, but they told Arthur that they wanted out.  This did not end well for anyone involved.

Ken and Don believed the buyout would be amicable. It was not. After a fair bit of histrionics, Ken and Don sued Arthur and won, causing further animosity.  Clara was a peacemaker, and in 1995, she persuaded Arthur to forgive his prodigal sons. Arthur reinstated them into executive positions, paid them the same salary as Buddy, and gave them nonvoting Interstate stock but not voting stock. Buddy, like the faithful son in the parable, did not react well to the open-armed homecoming.

The Estate Plan

Clara and Arthur settled revocable trusts in 1994 and 1995, respectively.  Arthur’s trust held all of Interstate’s stock, of which Arthur and Clara owned 82% of the voting stock and 73% of the nonvoting stock. The trust agreements provided that the stock would be held in trust throughout the lives of all three sons. The trusts also held real estate and marketable securities. Arthur died in April 1996, and Clara revised the plan.

When the trusts were created, Buddy was the only brother who owned Interstate voting stock; he owned 15.5% of the voting stock. Arthur and Clara wanted their sons to have equal voting rights after their deaths. To equalize the voting stock, the revised 1996 plan provided for unequal distribution of the trusts’ voting stock among the brothers’ subtrusts under Arthur’s trust. Thus, Buddy would inherit less voting stock than Ken and Don. After the distribution, each brother would own an equal number of voting shares.

Arthur and Clara wanted to compensate Buddy for this unequal treatment by giving him a greater share of Interstate’s nonvoting stock. Thus, the trusts would distribute more nonvoting stock to Buddy’s subtrust than his brothers’ subtrusts to make up for the unequal distribution of the voting stock. Each brother’s subtrust would receive the same total shares when counting both voting and nonvoting stock, but after the distributions Buddy would own more total stock. The voting and nonvoting stock are identical except for voting rights.

Under the 1996 plan, Interstate stock and other assets held in the trusts would have been includible in Clara’s gross estate upon her death. In addition, most Interstate stock would have been includible in the brothers’ gross estates when they died because the brothers had testamentary general powers of appointment over the assets in their subtrusts.

The 1996 plan exacerbated the controversies among the brothers. Buddy was upset after the stock distribution under the 1996 plan. Even though he would own more total shares, he felt cheated and felt that he deserved to receive at least the same number of voting shares as his brothers or possibly more because he was the only son who had been loyal to the business and the family.

Stepbrothers MorrissetteArthur and Clara tried to stop the continued animosity among the brothers by adding a fourth independent trustee as part of the 1996 plan, referred to as the “fourth brother” provision. Under the fourth brother provision, whenever two brothers disagreed with the third over a business matter, the matter was to be referred to the independent trustee with the understanding that the independent trustee would side with the brother in the minority unless the majority’s position was compelling. Accordingly, the brothers would need to make unanimous decisions on business matters or there would likely be a deadlock that prevented any matter from going forward. According to the trust documents, the role of the fourth trustee was to prevent two brothers from acting against the interests of the third brother in Interstate’s management. However, the fourth brother provision evolved into a veto culture where each brother felt entitled to reject his brothers’ business proposals.  Ah, the best laid plans of mice and men…

In 1996, Buddy was Interstate’s president and chief executive officer (CEO). Don was the president of a family real estate management company, AEM, Inc., and managed Interstate’s trucks and facilities. Ken was Interstate’s chief accounting officer and also managed its legal matters. By 2000 the brothers’ relationship had further deteriorated. Each brother felt that his brothers did not respect his area of expertise. The brothers fought over whether they worked hard enough and accused each other of not stepping up to handle enough responsibilities. They refused to take direction or suggestions from each other. Don and Ken’s relationship had grown so strained that they could not speak to each other about work matters and communicated through memoranda and email even though they had adjacent offices. By 2002 Don and Ken as well as Buddy’s sons, Bud and J.D., wanted Buddy to step down.  Suffice it to say, Buddy was less than pleased.

The tension among the brothers created by the 1996 plan was not the only problem. There was no definite plan on how to pay estate tax after Clara’s death, and there was a concern that the estate would need to sell real estate and Interstate stock. The brothers had a vague plan to pay the estate tax from Interstate’s profits over a 10-year period after their mother’s death. They believed that the estate would qualify for a payment deferral under IRC § 6166, which they “understood” would allow payment of estate tax over 10 years upon the death of a shareholder of a family-owned business. There were, however, two key problems with this plan.

First, the brothers ignored warnings from Interstate’s accountant that the estate would not qualify for the 10-year deferred payment because Clara held substantial passive investments in real estate. Buddy, in particular, was dismissive of the accountant’s concerns. Second, Don, Bud, and J.D. were concerned that paying the estate tax with Interstate’s profits could adversely affect the business. In particular, they were concerned that such a use of Interstate’s profits would jeopardize its Government contracts, which accounted for approximately 70% of its business, because withdrawing the profits could cause Interstate to fail the financial requirements for the award of Government contracts.

The Split-Dollar Life Insurance Plan

In early spring 2006 Bud met Alan Meltzer, an insurance broker. Mr. Meltzer inquired about Interstate’s life insurance needs and the purchase of life insurance as part of estate planning and asked to set up a meeting.  Subsequently, Mr. Meltzer introduced the five family members to Jim McNair, a tax and estate planning attorney.

Mr. McNair advised that the estate would not likely qualify for a payment deferral under the 1996 plan because of Clara’s real estate holdings and would likely have to pay the estate tax in full within nine months of her death. He advised that the trusts should restructure their real estate holdings to qualify for the deferral. He presented estate tax saving strategies including the purchase of life insurance through split-dollar arrangements. However, the implications of tax strategies were not discussed in detail. He provided marketing materials prepared by his firm’s marketing department that included information on split-dollar agreements. The marketing materials included an example of a grandmother who pays a $10 million life insurance premium as part of a split-dollar life insurance agreement in exchange for rights determined on the basis of the policy’s cash value. The marketing materials suggested that the estate could report the value of the grandmother’s rights under the split-dollar agreement for estate tax purposes at $565,000 or $1,445,000, a substantial discount from the $10 million premium.

Though Buddy initially bristled at the proposed change, he eventually came around.  Over the course of the next week, the brothers decided to proceed with a new estate plan (2006 plan) that included a buy-sell provision for each brother’s Interstate stock on his death, the purchase of life insurance on each other’s lives to finance the buyouts with a portion of the death benefits with Clara’s trust paying the life insurance premiums under split-dollar agreements, and Clara’s trust’s settlement of a dynasty trust for each brother to own the policies. The 2006 plan also restructured the real estate holdings of Arthur and Clara’s trusts so that the estate would qualify for a partial payment deferral of estate tax.

In November 2005, Clara was diagnosed with Alzheimer’s disease and dementia. The brothers decided to seek the creation of a temporary limited conservatorship for Clara to implement the 2006 plan. They understood that they had the authority to execute the 2006 plan without obtaining a court-appointed conservator because they served as co-trustees of Clara’ trust and held a power of attorney for Clara. However, they sought a conservatorship because they understood a conservatorship would make it more difficult for anyone of them to later challenge the 2006 plan. Quite simply, the brothers did not trust each other. A conservator was appointed, and the conservator thought that the actions taken as the conservator were in Clara’s best interests and in accordance with her wishes. However, no one took the time to actually explain the split-dollar agreements to the conservator.

In October 2006, each brother’s dynasty trust purchased two flexible-premium, adjustable life insurance policies, a type of universal life insurance, one on the life of each of his two brothers. For the policies insuring Don’s life, the dynasty trusts purchased policies from American General Life Insurance Co., and for Buddy’s and Ken’s lives, from Massachusetts Mutual Life Insurance Co. The policies had initial death benefits of $1 million with total premiums of $10,000 for the MassMutual policies and $30,000 for the American General policies. In October 2006, Clara’s trust issued six checks to pay these premiums in full. Each policy included a rider for additional death benefits of $8.73 million. Upon exercise of the riders, the total death benefits from each policy would be $9.73 million. Exercise of the rider would require additional premiums of approximately $5 million per policy, for total premiums of approximately $30 million and total death benefits of $58.2 million for the six policies. The dynasty trusts exercised the riders, but the record is unclear as to when they did so.

The insurance companies charged a monthly administrative fee, which the Tax Court points out is different from the cost of current life insurance protection (cost of current protection), a concept used for purposes of the economic benefit regime under Treas. Reg. § 1.61-22. The cost of current protection is used to determine the amount of the deemed annual gift. It is determined by rules set forth in the split-dollar regulations and is not based on the insurance company’s monthly fee with respect to the policy at issue. See Treas. Reg. § 1.61-22(d)(3). On the basis of the MassMutual and American General policy documents, the cash surrender value may include amounts that were previously treated as deemed gifts under the economic benefit regime.

At the end of October 2006, Clara’s trust entered into two split-dollar agreements with each dynasty trust under which it agreed to contribute to the dynasty trust an amount necessary to pay the premiums associated with the riders on the two life insurance policies held by the dynasty trust. On that date, Clara’s trust also paid in full the premiums owed for the riders. The premiums were $4.97 million for each American General policy and $4.99 million for each MassMutual policy. The amounts of prepaid premiums complied with the Code and did not cause the policies to exceed the limits established by the Code for the amount of an investment in a life insurance policy. See IRC § 7702A(b).

The parties to the split-dollar agreements could terminate them by mutual assent (mutual termination right or mutual termination restriction). The split-dollar agreements did not provide that their termination would force cancellation of the policies. The split-dollar agreements expressly prohibited Clara’s trust from canceling or surrendering the policies. The split-dollar agreements provided that if the dynasty trusts were to cancel the policy, the split-dollar agreement would terminate. Thus, the dynasty trusts could force termination of the split-dollar agreements without the consent of Clara’s trust by canceling the policies subject to their contractual obligations under the split-dollar agreements.

Finally, the Law of the Matter

Mrs. Morrissette reported the payment of the premiums as gifts to her sons for gift tax purposes to the extent required by the economic benefit regime of Treas. Reg. § 1.61-22, which treats the premiums as annual gifts equal to the annual cost of current protection. From 2006 to 2008 the total cost of current protection, i.e., the economic benefit, was $1,443,526.

In Estate of Morrissette v. Commissioner, 146 T.C. 171 (2016), the Tax Court held that the split-dollar agreements complied with the economic benefit regime, that Clara did not make taxable gifts of the premiums in 2006, and that Clara made annual gifts only of the cost of current protection for gift tax purposes. The Tax Court further held that although the dynasty trusts were the named owners of the policies in the policy documents, Clara’s trust was the deemed owner for gift tax purposes under the economic benefit regime. We held that the dynasty trusts did not have current access to the cash surrender values for any years before Clara’s death, defined as a current or future right to the cash surrender values. Id. at 182, 186.

IRC § 2001(a) imposes a Federal estate tax on the transfer of a decedent’s taxable estate. The taxable estate is defined as the value of the gross estate less applicable deductions. IRC § 2051. The gross estate includes “all property, real or personal, tangible or intangible, wherever situated’’, to the extent provided in IRC § 2033 through IRC § 2045. See IRC § 2031(a). IRC § 2033 is a broad inclusion provision and includes the value of all property in the gross estate to the extent of the decedent’s interest in the property at the time of her death. IRC § 2034 through IRC § 2045 explicitly mandate inclusion of more narrowly defined property interests. IRC § 2036 and IRC § 2038 are at issue here, as at all times prior to Clara’s death, her trust was revocable.

The IRS’s Argument

The IRS argued that IRC § 2036 and IRC § 2038 should be applied to the transfer of the premiums that Clara’s trust made as part of split-dollar agreements and argued that the values of the split-dollar rights should be included in the gross estate at least in the amount of the transferred premiums, $30 million total, or the cash surrender values of the underlying policies, approximately $32.6 million total.

IRC § 2036 and IRC § 2038

IRC § 2036 and IRC § 2038 require that inter vivos transfers be included in the gross estate where the decedent retained certain rights or powers in the transferred property. Both sections impose a broad scheme of inclusion in the gross estate, not limited by the form of the transaction, but concerned with all inter vivos transfers where outright disposition of the property is delayed until the transferor’s death. Guynn v. United States, 437 F.2d 1148, 1150 (4th Cir. 1971). IRC § 2036 and IRC § 2038 are aimed at preventing the use of inter vivos transfers to avoid estate tax where the decedent has retained enjoyment of the property. Estate of Strangi v. Commissioner, 417 F.3d 468, 476 (5th Cir. 2005), aff’g T.C. Memo. 2003-145; Estate of Thompson v. Commissioner, 382 F.3d 367, 375 (3d Cir. 2004), aff’g T.C. Memo. 2002-246.

IRC § 2036 (Transfers with Retained Life Estate) is designed to recapture the values of assets that the decedent transferred during her lifetime where she retained economic benefits of the assets. It is intended to include in the gross estate any inter vivos transfers that are essentially testamentary. Estate of Bongard v. Commissioner, 124 T.C. 95, 112 (2005). Specifically, IRC § 2036(a)(1) applies where the decedent retained possession or enjoyment of the transferred property or a right to income from the property, and IRC § 2036(a)(2) applies where the decedent retained a right or power to designate the persons who would possess or enjoy the property or receive the income from the property (right to designate). The right to designate can be held either alone or in conjunction with another person. IRC § 2036(a)(2). IRC § 2038(a) addresses revocable transfers. It applies where the decedent has the power to alter, amend, revoke, or terminate the transferee’s enjoyment of the property (power to alter) without regard to when or from what source the decedent acquired such power and without regard to whether the decedent holds the power alone or in conjunction with any other person.

The Law of Split-Dollar Insurance Policies

A split-dollar agreement is an arrangement between an owner and a nonowner of a life insurance contract in which one party pays all or any portion of the premiums on the life insurance contract, directly or indirectly, and is entitled to recover all or any portion of those premiums from, or payment is secured by, the proceeds of the life insurance contract. Treas. Reg. § 1.61-22(b)(1). The split-dollar regulations recognize the use of split-dollar arrangements for gift tax purposes. For a split-dollar agreement to which the economic benefit regime applies, the donee may exclude from gross income death benefits received from the policy as a result of the donor’s having paid gift tax on the cost of current protection. Where the requirements of the economic benefit regime are not satisfied, the donor’s payment of the premium is treated as a loan. See Treas. Reg. § 1.7872-15(a)(2)(i).

The IRS argued asserts that under the split-dollar agreements Clara’s trust retained possession, enjoyment or a right to income under IRC § 2036(a)(1), a right to designate under IRC § 2036(a)(2), or a power to alter under IRC § 2038(a) and, under any of these sections, the cash surrender values of the policies are included in the gross estate. In general, IRC § 2036 and IRC § 2038 apply if three conditions are met:[1]

  1. the decedent made an inter vivos transfer of property;
  2. the transfer was not a bona fide sale for adequate and full consideration; and
  3. the decedent retained an interest in or a right or power over the transferred property that she did not relinquish before her death, as defined in either section.

The Tax Court had previously held that a decedent’s right to terminate a split-dollar agreement and to recover at least the cash surrender value were rights, held in conjunction with another person, to designate the persons who would possess or enjoy the transferred property under IRC § 2036(a)(2) and to alter, amend, revoke, or terminate the transfer under IRC § 2038(a)(1). Estate of Cahill v. Commissioner, T.C. Memo. 2018-84, *15. In that case, the estate argued that neither section applied because the decedent held the right to terminate the split-dollar agreements only in conjunction with the counterparty to the split-dollar agreement and the counterparty could have prevented the decedent from terminating the split-dollar agreements. Id. at *15-*16.

The Tax Court in Cahill held that under the estate’s argument “the words ‘in conjunction with any person’ in IRC § 2036(a)(2), and ‘in conjunction with any other person’ in IRC § 2038(a)(1), would have no force or meaning.” Id. at *15. Accordingly, the Tax Court denied the estate’s motion for partial summary judgment that IRC § 2036 and IRC § 2038 did not apply or that the bona fide sale exception of either section was met. Id. at *16. The Commissioner had not filed a motion for partial summary judgment on these issues, and we declined to grant summary judgment in his favor on the basis that “there may be other facts or theories not yet presented.” Id. at *35.

Bona Fide Sale for Adequate Consideration

IRC § 2036 and IRC § 2038 both provide exceptions to the recapture of an inter vivos transfer in the gross estate if the transfer was a bona fide sale for an adequate and full consideration for money or money’s worth. The exceptions have the same meaning for both sections. Estate of Mirowski v. Commissioner, T.C. Memo. 2008-74. The exceptions aim to preclude the reach of IRC § 2036 and IRC § 2038 to transfers in which the decedent received consideration sufficient to protect against the depletion of the estate’s assets. See Estate of Magnin v. Commissioner, 184 F.3d 1074, 1079 (9th Cir. 1999), rev’g and remanding T.C. Memo. 1996-25. The exceptions can be though of as having two prongs: (1) the sale must have a legitimate and significant nontax purpose and (2) the sale must be made adequate and full consideration for money or money’s worth. Estate of Powell v. Commissioner, 148 T.C. 392, 411 (2017).

Legitimate Nontax Purpose

The first prong of the bona fide sale exception asks whether Clara had a legitimate and significant nontax motive for entering into the split-dollar agreement. See Bongard, 124 T.C. at 113, 118; Estate of Hurford v. Commissioner, T.C. Memo. 2008-278. The nontax purpose must be an actual motivation, not a theoretical justification, and the Tax Court requires some objective proof that the nontax reason was a significant factor that motivated the transfer. Bongard, 124 T.C. at 118.

The Tax Court also recognizes that “[l]egitimate nontax purposes are often inextricably interwoven with testamentary objectives.” Id. at 121. Thus, a finding that the decedent sought to save estate tax does not preclude a finding of a bona fide sale so long as saving estate tax is not the predominant motive. Estate of Black v. Commissioner, 133 T.C. 340, 362-63 (2009). The bona fide sale exception further requires that the transfer be made in good faith. Bongard, 124 T.C. at 118; see also Treas. Reg. § 20.2043-1(a).

In the context of transfers with respect to business entities, the Tax Court and other courts have held that efficient, active management of the business and management succession may be legitimate, nontax purposes. Estate of Bigelow v. Commissioner, 503 F.3d 955, 972 (9th Cir. 2007), aff’g T.C. Memo. 2005-65; Strangi, 417 F.3d at 481; Estate of Reynolds v. Commissioner, 55 T.C. 172, 194 (1970). Maintaining control over a family business can also be a legitimate, nontax purpose. Estate of Bischoff v. Commissioner, 69 T.C. 32, 39-41 (1977).

The Tax Court has found that closely held, family entities can provide a legitimate, nontax purpose even where the entity does not have an active business and was formed merely to perpetuate the decedent’s buy-hold investment philosophy with respect to publicly traded stock. Estate of Schutt v. Commissioner, T.C. Memo. 2005-126, *25. Management of family assets can also be a valid nontax purpose. See, e.g., Kimbell v. United States, 371 F.3d 257 (5th Cir. 2004); Estate of Mirowski v. Commissioner, T.C. Memo. 2008-74; Estate of Stone v. Commissioner, T.C. Memo. 2003-309; Estate of Harrison v. Commissioner, T.C. Memo. 1987-8.

Adequate and Full Consideration

To qualify for the bona fide sale exceptions, the transfer must have been made for adequate and full consideration in money or money’s worth. Treas. Reg. § 20.2036-1(a), Treas. Reg. § 20.2038-1(a). Adequate and full consideration for purposes of IRC § 2036 and IRC § 2038 requires an exchange of a roughly equivalent value that does not deplete the estate. Bongard, 124 T.C. at 119; see also Kimbell, 371 F.3d at 262, 265 (describing adequate and full consideration as an exchange of a “commensurate (monetary) amount” that “does not deplete the estate”); Wheeler v. United States, 116 F.3d 744, 759 (5th Cir. 1997) (stating adequate and full consideration requires that the sale not deplete the gross estate). The estate has the burden to prove that Clara’s trust received adequate and full consideration upon the execution of the split-dollar agreements. See Bongard, 124 T.C. at 118.

The adequacy of consideration is not defined on the basis of a willing buyer and willing seller and is not judged from the perspective of hypothetical persons. See Kimbell, 371 F.3d at 266. Rather, such concepts are part of the definition of fair market value. Id. Fair market value is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of the relevant facts. United States v. Cartwright, 411 U.S. 546, 551 (1973); Treas. Reg. § 20.2031-1(b).

The bona fide sale exception does not require an arm’s-length transaction, and an intrafamily transfer can constitute a bona fide sale. Bongard, 124 T.C. at 122-123; see IRC § 2036; IRC § 2038; Treas. Reg § 20.2036-1(a); Treas. Reg. § 20.2038-1(a); see also Thompson, 382 F.3d at 382-383. However, intrafamily transfers require heightened scrutiny. Bongard, 124 T.C. at 122-123; see also Thompson, 382 F.3d at 382-383; Kimbell, 371 F.2d at 262-263. Adequacy of consideration is ascertained on the basis of what would occur in an arm’s-length transaction. Bongard, 124 T.C. at 122-123.

The Tax Court considers whether “the terms of transaction differed from those of two unrelated parties negotiating at arm’s length.” Id. at 123. The Tax Court measures the adequacy of consideration on the transfer date, not the decedent’s death date. Estate of D’Ambrosio v. Commissioner, 101 F.3d 309, 313 (3d Cir. 1996), rev’g 105 T.C. 252 (1995). The adequate and full consideration requirement is met where the exchange is on terms similar to those that would occur in an arm’s-length transaction. Bongard, 124 T.C. at 122-123.

The Penalty Approval Matter

Emails may constitute written supervisory approval. Rogers v. Commissioner, T.C. Memo. 2019-61, *25. IRC § 6751(b) does not require the approval to be in any particular form. Palmolive Bldg. Inv’rs, LLC v. Commissioner, 152 T.C. 75, 85-86 (2019). Nor does it explicitly require a signature; it requires the penalty be “personally approved (in writing).” See Deyo v. United States, 296 F. App’x 157, [*120] 159 (2d Cir. 2008) (stating IRC § 6751(b) requires “only personal approval in writing, not any particular form of signature or even any signature at all”); Graev v. Commissioner, 149 T.C. at 488-489 & n.3 (finding a supervisor’s initials were sufficient written approval).

In the present case, the supervisor credibly testified that the revenue agent initially determined the penalties after an October 2013, conversation, and the supervisor approved the penalties a day later in an email. Accordingly, the IRS satisfied the procedural requirements of IRC § 6751(b).

The Penalty

Ultimately, after a lengthy discussion regarding valuation, the Tax Court found that the bona fide sale exceptions to both sections are satisfied. Accordingly, IRC § 2036 and IRC § 2038 did not require inclusion of the premiums or policies’ cash surrender values in Clara’s gross estate.  Nevertheless, the question remained on whether the assets that were included in her gross estate were properly valued.

In short order, the Tax Court found that the brothers’ appraisal was not reasonable, and the petitioners did not rely on it in good faith. Accordingly, the estate was not entitled to rely on the appraisal as a reasonable cause defense. The estate did not act reasonably or in good faith in the valuation of the split-dollar rights. Therefore, the estate is liable for the 40% penalty for the gross valuation misstatement of the split-dollar rights.

(T.C. Memo. 2021-60) Estate of Morissette v. Commissioner


[1] See Estate of Black v. Commissioner, 133 T.C. 340, 361-362 (2009); Estate of Bongard, 124 T.C. at 112.

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