Estate of Stewart v. Commissioner

Margot Stewart owned a five-story brownstone in Manhattan. Margot lived on the first two floors with her adult son, Brandon, and rented out the top three floors to an unrelated business. As part of her estate planning, Margot gifted a 49 percent interest in the brownstone to Brandon and retained the remaining 51 percent interest. Margot and Brandon then held the property as tenants in common and continued to live together on the first two floors. After the gift, the commercial tenant began experiencing financial issues, and its rent payments became inconsistent. When the tenant paid the rent, Margot continued to receive all of it; Brandon did not receive any of the rent payment. Whereas Brandon had not previously helped to cover the brownstone’s expense, he began covering a small but nontrivial portion after the gift. When Margot died, her estate (plaintiff) included only a 51 percent interest in the brownstone in her gross estate. The Internal Revenue Service (defendant) determined a deficiency, claiming that 100 percent of the brownstone should have been included. The estate challenged the deficiency in tax court and lost. The tax court made a factual determination that Margot and Brandon had an implied agreement that Margot would enjoy all the economic benefits of Brandon’s 49 percent interest during her lifetime. In making this determination, the tax court did not separately analyze Margot’s enjoyment of Brandon’s 49 percent interest in the residential part of the brownstone and her enjoyment of Brandon’s interest in the rental part of the brownstone. The estate appealed.