Estate of Maxwell v. Commissioner

Brief Fact Summary. The decedent, Lydia G. Maxwell transferred her property to her son and daughter-in-law, the Maxwells. The decedent continued to reside in the property until her death. The Maxwells transferred a mortgage note in the amount of $250,000 to the decedent. The decedent paid rent payments to the Maxwells in the amount of the interest on the property and forgave their mortgage debt in full upon her death.

Synopsis of Rule of Law. Under I.R.C. Section 2036, where property is disposed of by a decedent during her lifetime but the decedent retains “possession or enjoyment” of it until her death, that property is taxable as a part of the decedent’s gross estate, unless the transfer was a bona fide sale for an adequate and full consideration.

Facts. The decedent was eighty-two years old and suffering from cancer when she transferred her home to the Maxwells. The decedent had sole possession of the residence during the period between the day she sold her home to the Maxwells and the day she died. There was no evidence showing that the Maxwells ever intended to occupy the house themselves, or to sell or lease it to anyone else during the decedent’s lifetime. The Maxwells failed to demand payment by the estate as they were entitled to do under the lease, of the rent due for the months following decedent’s death and preceding their sale of the property. The decedent paid rent to the Maxwells that were equal to the mortgage interest. In each of the following years preceding her death, the decedent forgave $20,000 of the mortgage principal. The decedent forgave the Maxwell’s entire mortgage debt pursuant to her will. The Maxwells sold the house for $550,000 after the decedent’s death.

Issue.
Whether the decedent retained possession and enjoyment of the property during her lifetime?

Whether the transfer was a bona fide sale for adequate and full consideration in money or money’s worth?

Held.
Yes. The decedent retained possession and enjoyment of the property during her lifetime. The decedent did in fact reside in the house from the time that she transferred it to the Maxwells until the time that she died. The rent payments which the decedent made were offset by the mortgage interest and the Maxwells did not demand rent payments after the day that the decedent died and preceding their sale which they were entitled to.

No. The transfer of the house was substantially a gift to the Maxwells. The conduct of the Maxwells and the decedent suggest that neither party intended that the Maxwells pay any part of the principal of the original note or any successor note. The decedent forgave $20,000 of the mortgage principal each year and upon her death, she forgave the entire mortgage debt.

Discussion. The transfer here was not bona fide even though the note was fully secured and legally enforceable on its face. The parties’ conduct suggested that the intent was that the mortgage note never be repaid so the value of the house at the time of the subsequent sale is a part of the decedent’s estate.