Estate of D'Ambrosio v. Commissioner

Rose D’Ambrosio owned a block of stock worth approximately $2.35 million. At age 80, D’Ambrosio retained a life interest in the stock, i.e., a right to receive income from the stock for the rest of her life, but sold the stock’s remainder interest, i.e., the right to own the stock after she died. In exchange for the remainder interest, D’Ambrosio received an annuity that would make payments to her until she died. This annuity was worth approximately $1.32 million, which was the fair market value of the stock block’s remainder interest. When D’Ambrosio died, the commissioner of Internal Revenue (commissioner) (defendant) determined that, under 26 U.S.C. § 2036(a), the stock’s remainder interest was like a testamentary gift that depleted the gross estate of the stock block’s full, fee-simple value at D’Ambrosio’s death. Because D’Ambrosio had not received the stock’s full, fee-simple value in exchange for that remainder interest, the commissioner believed that the gross estate ended up short of assets. To avoid this arguable shortfall in the gross estate, the commissioner included the full $2.35 million stock block in D’Ambrosio’s gross estate, deducted the amount of annuity payments D’Ambrosio had received for the stock, and assessed estate tax on the remaining amount. D’Ambrosio’s estate (plaintiff) petitioned the United States Tax Court for a determination that none of the stock was part of the gross estate because the only interest that still existed at D’Ambrosio’s death—the remainder interest—had been transferred during D’Ambrosio’s life for its fair market value. The Tax Court ruled that D’Ambrosio’s receipt of less than the stock’s full, fee-simple value meant that D’Ambrosio had not received adequate and full consideration and that the entire stock block was a taxable part of the gross estate. The estate appealed to the Third Circuit.