While Not Advisable, Battling IRS Need Not Mean Defeat

Getting into a fight with the Internal Revenue Service is almost never a good idea.

However, one wealthy woman did win a legal battle regarding the gift tax exemption.

“There wouldn’t seem to be a whole lot of loopholes available for people making use of the gift tax exemption to reduce their estate taxes,” according to a recent article on the website Lifehealthpro. “But that doesn’t stop people from trying to invent ways around it. One such person was Jean Steinberg, a very wealthy 89-year-old woman with four daughters. She gave the daughters a $72 million gift of cash and securities, which, needless to say, was well over the gift tax limit. But she came up with a strategy to reduce the value of that gift, and thereby reduce the taxes on them.”

That strategy, according to the story’s author, Tom Nawrocki, hinged on what’s termed the “three-year rule,” which is aimed at preventing people from giving away their property just prior to death.

“If Steinberg had passed away within three years of making the gift, the assets would revert to her estate, and the estate would owe tax on it,” the article continued. “In order to keep her estate tax from paying the full rate on that amount, Steinberg asked her daughters to take the full responsibility for it if she should pass away within three years.

“Steinberg’s daughters agreed to assume any gift or estate taxes that would result if she passed away within three years of making the gift. She then made the claim that the value of their gift should be reduced by the amount that would revert back to the estate in case of their mother’s death. The gift had been drawn up very carefully. If the daughters did not agree to cover the estate taxes, they wouldn’t be eligible for any further distributions from the estate. Therefore, Steinberg argued, the gift was contingent on the payment of those taxes and should be reduced by their value. And since Steinberg was 89 at the time, there was a good chance she wouldn’t make it through that three-year window.”

The IRS naturally disputed this interpretation of things, and wanted an additional $1.8 million in taxes.

“But Steinberg, who had hung in there and was still alive, fought the IRS ruling. Earlier this month, the tax court decided in her favor,” Nawrocki wrote. “It ruled that the increased tax burden the daughters took on did indeed count as a reduction for the value of the net gift.”