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By Deborah M. Beers, Esq.
Buchanan Ingersoll & Rooney P.C., Washington, D.C.
In Estate of Van v. Comr., T.C. Memo 2011-22 (1/27/11), Decedent Adelina Van lived in a house, got title to the house, and then tried to give the house away when she began to think about her own death. She did not actually move out of the house before she died, and the Tax Court held that, because she had retained the beneficial enjoyment of the property during her lifetime, it was includible in her gross estate under §2036 ("Transfers With Retained Life Estate").
In 1962, Adelina Cheng Van emigrated to the United States from China as a divorced 41-year-old mother of four. She eventually settled in San Mateo, California, with three of her children — Norma, Robert, and Michael. From 1965 to 1973, the Vans lived in a house that they had owned in Foster City, California. But then Van started courting a man named Marcel Periat, who in June 1973 bought a house for her on Capistrano Way in San Mateo, very close to his own home. Periat incurred all the costs himself and kept title to the property in his own name. Van moved into the Capistrano house and began living there expense free.
In 1988, Van's daughter and son-in-law, Norma Van Hu and James Hu ("the Hus") asked Van to see if Periat would sell the Capistrano house to them. Periat instead negotiated a "Mutual Agreement and Release" with Van. The Agreement required him to sell the Capistrano house to Van for $250,000, with $170,000 as a down payment and a secured promissory note to him for the remaining $80,000. Van, however, did not use her own money. The Hus were the source of her funds, both of the down payment and of the payments on the note.
Although Van took title to the house in 1989, within hours of recording the deed Van recorded a grant deed conveying title to the house to herself and two of her grandchildren — the Hus' daughters Virginia and Arleen, as joint tenants. Without telling her daughter and son-in-law, Van then had Virginia and Arleen re-convey sole title back to her in 1994. In August 1997, Van created the Adelina Cheng Van Revocable Trust and deeded the Capistrano house to herself as trustee in December 1997. Two years later, she transferred title to the house from herself as trustee to her daughter Norma and three granddaughters: Virginia, Arleen, and Christina Hu. All of these transfers were without consideration.
Van died on May 1, 2000. Her estate's federal estate tax return disclosed the existence of the Capistrano house but did not list the house as an asset of the estate. The Commissioner sent the estate a notice of deficiency that included the Capistrano house as a taxable asset of Van's estate, claiming that Van retained possession or enjoyment of the Capistrano house until she died, "even after title to it began ducking and weaving throughout her extended family."
The estate contested the inclusion, arguing that it was really the Hus who owned the house. They purportedly gave the money to Van under what they claim was an agreement that they were to be the legal purchasers of the house, even though Van would take title to placate Periat. The estate argued that the Hus' past dealings with Van, in which she served as their agent for real-estate purchases, supported this characterization.
Burden of Proof
In a move that the Tax Court itself described as "uncommon," it determined that the Commissioner in this case bore the burden of proof for the following reasons:The estate clearly flagged the issue in its return: It listed the Capistrano house and its fair market value on "Schedule A — Real Estate" and then deducted the value, explicitly noting the estate's belief that Van had no ownership interest in the house as the Hus had provided the purchase money and title had passed to Norma Hu and her three daughters before Van's death. The estate also went out of its way to cooperate with the IRS — it allowed the IRS to interview the Hus in its counsel's office; provided the IRS with all the relevant documents … and even translated Van's letters into English for the IRS.
Despite the shift in the burden of proof, the Tax Court decided the case in favor of the Commissioner, on the basis of §2036, which "includes in a decedent's gross estate the value of all property that a decedent gives away but which she keeps in her possession or in which she continues to enjoy an interest until her death."
The estate argued that, under California law, Van never had an interest in the Capistrano house because Norma Hu and her husband were the real owners. Van purportedly had taken title only as their agent. To back up this claim, the estate pointed to other real-estate transactions where Van served as the Hus' agent. The court found this argument unconvincing because, in this case, unlike others in which Van actually took title as the Hus' agent, "Van took legal title to the Capistrano house in her own name and actually lived there."
In fact, noted the court, California law actually presumes that "[t]he owner of the legal title to property is … the owner of the full beneficial title. This presumption may be rebutted only by clear and convincing proof …" which was clearly lacking in this case.
Nor did the court agree with the estate's fallback position that a resulting trust was established under state law when the Hus supplied the money for the purchase. "This concept of a resulting trust," noted the court, "does exist in California law." However, even if such a doctrine exists, in this case there was clear evidence " … that Van not only `intended to take the beneficial interest' in the Capistrano home, she actually did take a beneficial interest — after all, she was living there until she died." In addition, in this case, the relationship of Van to the Hus - i.e., that of parent and child — "is a circumstance which prima facie establishes the presumption of an advancement and thereby rebuts the presumption of a resulting trust."
Having found that Van had a beneficial interest in the house, the court's next task was to determine if her divestment of title to the house acted to remove the value from her estate. It found that the divestment of title was irrelevant because Van's relationship to the property did not change in that she retained the possession and enjoyment of the property until her death, without the payment of rent or other charge.
The court therefore concluded that the house should be included in Van's gross estate for federal estate tax purposes.
The Van case may be contrasted with the recent decision of the Second Circuit in Estate of Stewart v. Comr., No. 07-5370 (2d Cir. 8/9/10), in which the appellate court, reversing the Tax Court, held that there was no implied agreement to retain the benefit of 100% of the use of certain real property that the decedent owned and occupied jointly with her son after she transferred a 49% interest in the property to him. It may be that Van's sole occupancy was determinative in this case, negating whatever implied agency agreement she may have had with her children.
For more information, in the Tax Management Portfolios, see Lischer, 52 T.M., Incomplete Lifetime Transfers: Retained Beneficial Interests Under Sections 2036(a)(1) and 2037, and Streng, 800 T.M., Estate Planning, and in Tax Practice Series, see ¶6200, Pre-Death Transfers — Sections 2035, 2036, 2037 and 2038.
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