      JEAN STEINBERG, DONOR, PETITIONER v. COMMISSIONER
              OF INTERNAL REVENUE, RESPONDENT

           Docket No. 23865–11.         Filed September 16, 2015.

         P entered into a binding gift agreement with her daughters
       under which P gave her daughters properties and in exchange
       the daughters agreed to assume and to pay, among other
       things, any estate tax liability imposed under I.R.C. sec.
       2035(b) as a result of the gifts in the event that P passed
       away within three years of the gifts. In calculating for gift tax
       purposes the gross fair market value of the property trans-
       ferred to the daughters, P reduced the fair market value of

184
(184)                 STEINBERG v. COMMISSIONER                            185


        the properties by an amount representing the value of the
        daughters’ assumption of the I.R.C. sec. 2035(b) estate tax
        liability, among other things. Held: The daughters’ assump-
        tion of a potential I.R.C. sec. 2035(b) estate tax liability was
        a detriment to the daughters and a benefit to P such as would
        be considered by a willing buyer and willing seller in deter-
        mining a sale price of the transferred property rights. Held,
        further, the net gift agreement did not duplicate the effect of
        New York law. Held, further, the value of the daughters’
        assumption of potential I.R.C. sec. 2035(b) estate tax liability
        was determined using R’s mortality tables and applying
        interest rates under I.R.C. sec. 7520 as a discount factor.

   John W. Porter, Michael S. Arlein, Keri D. Brown, and Jef-
frey D. Watters, Jr., for petitioner.
   John Richard Mikalchus and Molly H. Donohue, for
respondent.
   KERRIGAN, Judge: Respondent issued petitioner a notice of
deficiency, increasing petitioner’s gift tax liability by
$1,804,908 for tax year 2007. Respondent disallowed the dis-
count petitioner made for her daughters’ assumption of the
section 2035(b) estate tax liability.
   Unless otherwise indicated, all section references are to the
Internal Revenue Code in effect for the tax year in issue, and
all Rule references are to the Tax Court Rules of Practice
and Procedure. We round all monetary amounts to the
nearest dollar.
   The issues for consideration are (1) whether a donee’s
promise to pay any Federal or State estate tax liability that
may arise under section 2035(b) if the donor dies within
three years of the gift should be considered in determining
the fair market value of the gift, and (2) if so, the amount,
if any, that the promise to pay reduces the fair market value
of the gift.

                            FINDINGS OF FACT

   Some of the facts are stipulated and are so found. Peti-
tioner resided in New York when she filed the petition.
   Petitioner married Meyer Steinberg in 1944. Petitioner and
Mr. Steinberg had four children: Susan Green, Bonnie
Englebardt, Carol Weisman, and Lois Zaro (collectively,
daughters).
186        145 UNITED STATES TAX COURT REPORTS            (184)


   Mr. Steinberg was one of the founders of Enterprise Asset
Management, Inc. (EAM). Mr. Steinberg served as the chief
executive officer of EAM from its inception. Petitioner’s
daughters served as directors of EAM during 2007.
   On June 20, 2002, petitioner executed a will (2002 will). In
the 2002 will petitioner named Mr. Steinberg as the bene-
ficiary of her residuary estate unless he predeceased her, in
which case each of her daughters would split her residuary
estate in equal shares.
   Mr. Steinberg died on December 4, 2003. Mr. Steinberg left
a will that established a marital trust (marital trust). Peti-
tioner was named the trustee and a beneficiary of the mar-
ital trust, and she was granted a power of appointment over
the assets of the marital trust. As of April 17, 2007, the mar-
ital trust held assets with a total value of $122,850,623. The
assets of the marital trust consisted of ownership interests in
several different entities worth $17,820,648 (representing
14.5% of the total value) and cash.
   On December 20, 2005, petitioner executed a codicil to the
2002 will (2005 codicil). The 2005 codicil provided that only
Ms. Englebardt, Ms. Weisman, and Ms. Zaro would inherit
under the marital trust and her residuary estate.
   On July 21, 2006, petitioner executed a new will (2006
will). The 2006 will provided that all four of her daughters
would split her residuary estate in equal shares. The 2006
will also provided that (1) any estate taxes imposed with
respect to property passing under the 2006 will would be
paid out of petitioner’s residuary estate and (2) if petitioner
died within three years, any section 2035(b) estate tax would
be apportioned to her daughters.
   During 2006 and 2007 the daughters requested that peti-
tioner terminate the marital trust so they could receive
immediate distributions of its assets. Petitioner agreed to
terminate the trust and began negotiations.
Net Gift Agreement
   On April 17, 2007, petitioner entered into a binding gift
agreement (net gift agreement) with her daughters. Peti-
tioner also terminated the marital trust. At that time peti-
tioner was 89 years old. The assets of the marital trust were
distributed as follows: (1) $3,401,316 to pay outstanding legal
fees; (2) $10 million to petitioner; and (3) the remainder of
(184)                STEINBERG v. COMMISSIONER                             187


the assets to the daughters pursuant to the net gift agree-
ment.
  In the net gift agreement petitioner agreed to make gifts
of properties to her daughters. In exchange, her daughters
agreed to assume and to pay any Federal gift tax liability
imposed as a result of the gifts. The daughters also agreed
to assume and to pay any Federal or State estate tax liability
imposed under section 2035(b) as a result of the gifts in the
event that petitioner passed away within three years of the
gifts. Section 3, Federal and State Estate Tax, of the net gift
agreement provides in pertinent part:
    a. Assumption of Federal and State Estate Tax Liability. Each Donee
  hereby agrees to assume, pay and indemnify the Executor against all
  additional federal and state estate tax liability assessed pursuant to
  Code Section 2035(b) (i) if Mrs. Steinberg [petitioner] does not survive
  for three years following the Effective Date and(ii) that is directly attrib-
  utable to Mrs. Steinberg’s transfer of the Gift Property made under the
  Instruments of Transfer, including all penalties and interest which
  accrue upon such estate tax liability except such penalties and interest
  that are directly attributable to actions or delays committed by the
  Executor or another Donee (the Estate Tax Liability). For purposes of
  determining and allocating the Estate Tax Liability, (i) the value of all
  additional tax shall be as finally determined for federal estate tax pur-
  poses, (ii) the only gift tax taken into account in the calculation shall be
  the gift tax on Mrs. Steinberg’s transfers of the Gift Property to the
  Donees made under the Instruments of Transfer, and (iii) the amount
  of the Estate Tax Liability each Donee shall bear shall be an amount
  equal to the Estate Tax Liability attributable to the Donee’s Gift Tax
  Share A and the Donee’s Gift Tax Share B (in each case, collectively, the
  Donee’s Estate Tax Share).

                         *   *    *   *    *   *    *
    c. Payment of Estate Tax Liability.
       i. Donees’ Payment to Executor. Each Donee shall deliver to the
    Executor an amount equal to the Donee’s Estate Tax Share by cer-
    tified check made payable to the United States Treasury, no later than
    thirty days before the due date for payment of the Estate Tax
    Liability, or, if later, as soon thereafter as the Executor notifies the
    Donee of the amount of the Estate Tax Liability.

  The net gift agreement also provides remedies if any
daughter fails to pay her share of any section 2035(b) estate
tax liability. Section 7(c), Remedy Available in Event of
Default, of the net gift agreement provides in pertinent part:
188             145 UNITED STATES TAX COURT REPORTS                       (184)

         ii. Default in Payment of Estate Tax Liability. If the Executor deter-
      mines that a Donee is in default * * * the Executor shall give notice
      to the Donee that the Donee is in default (Estate Tax Default Notice
      and Estate Tax Default Notice Date, respectively). If the Donee fails
      within 10 business days after the Default Notice Date to deliver to the
      Executor the remaining balance of the Donee’s Estate Tax Share of the
      Estate Tax Liability (Donee’s Estate Tax Balance), all Cash Distribu-
      tions [i.e., certain quarterly distributions to which the donees are enti-
      tled] otherwise distributable to a Donee shall be delivered directly to
      the Executor * * * . Each Donee agrees that, upon the date on which
      the Executor gives an Estate Tax Default Notice to a Donee, the
      Executor also shall deliver a duplicate copy of the Estate Tax Default
      Notice to the Manager, and the Donee shall be deemed to have
      directed the Manager to deliver the Cash Distribution otherwise
      distributable to the Donee directly to the Executor in satisfaction of
      the Donee’s Estate Tax Balance as provided in this paragraph. Each
      Donee agrees to perform any and all acts necessary as a shareholder,
      partner, member, manager or director of any entity governed by an
      Applicable Agreement to effect the payment of the Donee’s Estate Tax
      Balance to the Executor.

  The net gift agreement was the result of several months of
negotiation between petitioner and her daughters. Petitioner
and her daughters were represented by separate counsel. The
fair market value of the properties transferred by petitioner
to her daughters before consideration of the gift tax liability
and section 2035(b) estate tax liability assumed by the
daughters was $109,449,307.
  Also on April 17, 2007, the daughters signed an escrow
agreement. Pursuant to the escrow agreement the daughters
each transferred $10 million to an escrow fund set up with
HSBC Bank. Of the $40 million, $32,437,261 was used to pay
the Federal gift tax that resulted from the gifts, and the
remaining balance was set aside to pay any section 2035(b)
estate tax liability. 1
Valuation of Property
  To determine the fair market value of the property rights
petitioner transferred pursuant to the net gift agreement,
petitioner hired William H. Frazier, a qualified appraiser.
Mr. Frazier concluded that the aggregate value of the net gift
on the date it was made, April 17, 2007, was $71,598,056. He
determined that the present value of the net gifts was the
 1 This   calculation is based on the amount of tax before credits.
(184)                STEINBERG v. COMMISSIONER                               189


fair market value of assets conveyed by transfer from the
donor less the liabilities (tax or otherwise) assumed by the
donees. According to the valuation, the payment by the
donees of their share of the estate taxes is a contingent
liability and the probability of this liability can be calculated.
Tax Return and Notice of Deficiency
  On October 15, 2008, petitioner timely filed a Form 709,
United States Gift (and Generation-Skipping Transfer) Tax
Return, for tax year 2007. On the Form 709 petitioner
reported taxable gifts of $71,598,056 and total gift tax of
$32,034,311. Petitioner attached a summary of the net gift
agreement which included a description of Mr. Frazier’s
determination of the value of the net gifts, to the Form 709.
  On July 25, 2011, respondent mailed the notice of defi-
ciency, which increased the aggregate value of petitioner’s
net gifts to her daughters from $71,598,056 to $75,608,963,
for a total gift tax increase of $1,804,908. Respondent dis-
allowed the discount petitioner made for her daughters’
assumption of the section 2035(b) estate tax liability. 2 The
parties agree that the net gift agreement resulted in a net
gift.

                                   OPINION

I. Burden of Proof
   Generally, taxpayers bear the burden of proving that the
Commissioner’s determinations in the notice of deficiency are
erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115
(1933). The burden of proof may shift to the Commissioner
if the taxpayers establish that they complied with the
requirements of section 7491(a)(2)(A) and (B) to substantiate
items, to maintain required records, and to cooperate fully
with the Commissioner’s reasonable requests. However, we
decide these issues on the preponderance of the evidence
and, therefore, the burden of proof is not relevant. See Estate
  2 The  notice of deficiency increased the value of petitioner’s total gifts for
tax year 2007 by $4,010,907 because of ‘‘net gifts to donor’s four daugh-
ters’’. Nonetheless, both respondent and petitioner claim that the notice of
deficiency disallowed petitioner’s entire $5,838,540 discount for her daugh-
ters’ assumption of the sec. 2035(b) estate tax liability.
190          145 UNITED STATES TAX COURT REPORTS                   (184)


of Black v. Commissioner, 133 T.C. 340, 359 (2009); Knudsen
v. Commissioner, 131 T.C. 185, 189 (2008).
II. Statutory Framework
  A. Gift Tax Generally
   Section 2501(a) imposes a tax on the transfer of property
by gift. The donor is primarily responsible for paying the gift
tax. Sec. 2502(c); see also sec. 25.2502–2, Gift Tax Regs. The
gift tax is imposed upon the donor’s act of making the
transfer, rather than upon receipt by the donee, and it is
measured by the value of the property passing from the
donor, rather than the value of enrichment resulting to the
donee. Sec. 25.2511–2(a), Gift Tax Regs. Donative intent on
the part of the donor is not an essential element for gift tax
purposes; the application of gift tax is based on the objective
facts and circumstances of the transfer rather than the
subjective motives of the donor. Sec. 25.2511–1(g)(1), Gift
Tax Regs.
   The amount of gift tax is based on the aggregate value of
taxable gifts made during the year, among other things. See
sec. 2502(a) (imposing the gift tax on a cumulative basis).
Taxable gifts are the total amount of gifts made during the
year, less certain deductions. 3 Sec. 2503(a). The amount of a
gift of property is generally the value of the property on the
date of the gift. Sec. 2512(a). The gift is complete when the
property has left the donor’s dominion and control. See sec.
25.2511–2(b), Gift Tax Regs. The value of the property is the
price at which it would change hands between a willing
buyer and a willing seller, neither being under any compul-
sion to buy or to sell and both having reasonable knowledge
of the relevant facts. Sec. 25.2512–1, Gift Tax Regs.
   The willing buyer and the willing seller are hypothetical
persons, rather than specific individuals or entities, and the
individual characteristics of these hypothetical persons are
not necessarily the same as the individual characteristics of
the actual seller or the actual buyer. Estate of Bright v.
United States, 658 F.2d 999, 1005–1006 (5th Cir. 1981);
Estate of Kahn v. Commissioner, 125 T.C. 227, 231
(2005); Estate of Davis v. Commissioner, 110 T.C. 530, 535
  3 Sec. 2503 also enumerates a handful of exclusions, none of which are

relevant in this case.
(184)            STEINBERG v. COMMISSIONER                    191


(1998). The willing seller is purely hypothetical and not the
actual taxpayer. See Chapman Glen Ltd. v. Commissioner,
140 T.C. 294, 325 (2013). The willing buyer is a purely hypo-
thetical figure, and valuation does not take into account the
personal characteristics of the actual buyers. Estate of
Newhouse v. Commissioner, 94 T.C. 193, 218 (1990). The
hypothetical ‘‘willing buyer/willing seller’’ test substitutes the
most economically rational analysis of a sale for evidence of
the actual buyer’s intent. Estate of Jameson v. Commissioner,
267 F.3d 366, 372 (5th Cir. 2001), vacating and remanding
T.C. Memo. 1999–43.
  The amount of the gift is the amount by which the value
of the property transferred exceeds the value of consideration
received in money or money’s worth. See sec. 2512(b); secs.
25.2511–1(g)(1), 25.2512–8, Gift Tax Regs.; see also Commis-
sioner v. Wemyss, 324 U.S. 303, 306–307 (1945). Thus, if a
donor makes a gift subject to the condition that the donee
pay the resulting gift tax, the amount of the gift is reduced
by the amount of the gift tax. See Harrison v. Commissioner,
17 T.C. 1350, 1357 (1952). Such a gift is commonly referred
to as a ‘‘net gift’’.
  B. Section 2035(b) ‘‘Gross-Up’’ Provision
   Under section 2035(b) (formerly section 2035(c), amended
by the Taxpayer Relief Act of 1997, Pub. L. No. 105–34, sec.
1310(a), 111 Stat. at 1043) a decedent’s gross estate is
increased by the amount of any gift tax paid by the decedent
or the decedent’s estate on any gift made by the decedent
during the three-year period preceding the decedent’s death.
For purposes of this ‘‘gross-up’’ provision, we have decided
that the phrase ‘‘gift tax paid by the decedent or the
decedent’s estate’’ during the relevant three-year period
includes gift tax attributable to a net gift the decedent made
during that period (despite the fact that the donee is respon-
sible for paying the gift tax in that situation). Estate of Sachs
v. Commissioner, 88 T.C. 769, 777–778 (1987), aff ’d in part,
rev’d in part on other grounds, 856 F.2d 1158, 1164 (8th Cir.
1988).
   Congress enacted what is now section 2035(b) as part of an
effort to mitigate the disparity of treatment between the tax-
ation of lifetime transfers and transfers at death. See H.R.
Rept. No. 94–1380, at 11 (1976), 1976–3 C.B. (Vol. 3) 735,
192           145 UNITED STATES TAX COURT REPORTS                        (184)


745. 4 Congress imposed the gross-up provision on gift tax
paid within three years of death because ‘‘the gift tax paid
on a lifetime transfer which is included in a decedent’s gross
estate is taken into account both as a credit against the
estate tax and also as a reduction in the estate tax base, [so]
substantial tax savings can be derived under present law by
making so-called ‘deathbed gifts’ even though the transfer is
subject to both taxes.’’ Id. at 12, 1976–3 C.B. (Vol. 3) at 746.
Congress intended the gross-up rule to ‘‘eliminate any incen-
tive to make deathbed transfers to remove an amount equal
to the gift taxes from the transfer tax base.’’ Id.
  C. Net Gifts
   The net gift rationale flows from the basic premise that the
gift tax applies to transfers of property only to the extent
that the value of the property transferred exceeds the value
in money or money’s worth of any consideration received in
exchange therefor. See sec. 2512(b); sec. 25.2512–8, Gift Tax
Regs. When a net gift occurs, the donor calculates his or her
gift tax liability by reducing the amount of the gift by the
amount of the gift tax. Estate of Morgens v. Commissioner,
133 T.C. 402, 417 (2009), aff ’d, 678 F.3d 769 (9th Cir. 2012).
The rationale is that ‘‘because the donee incurred the obliga-
tion to pay the tax as a condition of the gift, ‘the donor did
not have the intent to make other than a net gift.’ ’’ Id.
(quoting Turner v. Commissioner, 49 T.C. 356, 360–361
(1968), aff ’d per curiam, 410 F.2d 752 (6th Cir. 1969)). In
other words the donor reduces the value of the gift by the
amount of the tax because the donor has received consider-
ation for a part of the gift equal to the amount of the
applicable gift tax. Id.
   Petitioner’s gift may be best described as a ‘‘net, net gift’’
because the donees agreed to pay both the resulting gift tax
and any section 2035(b) estate tax. We will refer to peti-
tioner’s gift in its entirety as a net gift.

  4 Beforethe enactment of sec. 2035, gifts made within three years of the
donor’s death were merely presumed to be in contemplation of death. See
H.R. Rept. No. 94–1380, at 12 (1976), 1976–3 C.B. (Vol. 3) 735, 746. Con-
gress opted for a bright-line test in sec. 2035 to end the ‘‘considerable liti-
gation concerning the motives of decedents in making gifts.’’ Id.
(184)              STEINBERG v. COMMISSIONER                 193


III. Steinberg I
   Respondent contends that the daughters’ assumption of
petitioner’s section 2035(b) estate tax liability does not con-
stitute consideration in money or money’s worth under sec-
tion 2512(b). We earlier denied respondent’s motion for sum-
mary judgment on this point, concluding that the ‘‘estate
depletion’’ theory involved material facts that were the sub-
ject of genuine dispute. See Steinberg v. Commissioner (Stein-
berg I), 141 T.C. 258 (2013). In Steinberg I we held that the
daughters’ assumption of the section 2035(b) estate tax
liability might be quantifiable and reducible to monetary
value and that a willing buyer and a willing seller, in
arriving at a sale price, might take the daughters’ assump-
tion of this liability into account in appropriate cir-
cumstances. We held a trial to establish the facts relevant to
these and other issues in the case.
IV. Consideration of the Promise To Pay
  A. A Willing Buyer and a Willing Seller
  The fundamental question posed by this case is the fair
market value of the property rights transferred under the net
gift agreement. Pursuant to section 25.2512–1, Gift Tax
Regs., fair market value is the price at which such property
would change hands between a willing buyer and a willing
seller, neither being under any compulsion to buy or to sell
and both having reasonable knowledge of relevant facts. All
relevant facts and elements of value as of the time of the gift
must be considered. Id. The ‘‘willing buyer/willing seller’’ test
is the bedrock of transfer tax valuation. It requires us to
determine what property rights are being transferred and on
what price a hypothetical willing buyer and willing seller
would agree for those property rights.
  The ownership of property has been referred to as owning
a ‘‘bundle of rights.’’ Estate of Gibbs v. United States, 161
F.3d 242, 247 (3d Cir. 1998) (quoting Loretto v. Teleprompter
Manhattan CATC Corp., 458 U.S. 419, 435 (1982)). In val-
uing property, all of the rights that constitute that bundle
must be considered. See Guggenheim v. Rasquin, 312 U.S.
254, 257 (1941) (‘‘To single out one and to disregard the
others is in effect to substitute a different property interest
194        145 UNITED STATES TAX COURT REPORTS             (184)


for the one which was the subject of the gift.’’). The fair
market value of transferred property must take into account
any restrictions or conditions limiting the property’s market-
ability, including those imposed by the donor. Rolfs v.
Commissioner, 135 T.C. 471, 489 (2010), aff ’d, 668 F.3d 888
(2012).
   Pursuant to the net gift agreement (1) the daughters’
receive property with a fair market value of $109,449,307
and (2) the daughters’ have an obligation to pay the
$32,012,711 gift tax liability. In Steinberg I we held that a
willing buyer and a willing seller in appropriate cir-
cumstances could consider the donee’s assumption of the sec-
tion 2035(b) estate tax liability when determining a sale
price. 141 T.C. at 281. We now decide whether the net gift
agreement is such an appropriate circumstance. An appro-
priate circumstance arises when the donee’s assumption of
the section 2035(b) estate tax liability is a detriment to the
donee and is a benefit to the donor.
  1. Detriment to the Donee
   A willing buyer of the property rights pursuant to the net
gift agreement would recognize that to obtain the properties,
he or she would also have to assume both the gift tax and
the section 2035(b) estate tax liabilities associated with the
transfer. The gift tax and the section 2035(b) estate tax
liabilities did not exist before the net gift agreement. These
liabilities arose as a result of the net gift agreement. The net
gift agreement was the product of lengthy negotiations. The
daughters had to agree to assume the liabilities in order to
gain the benefit of the property they received under the net
gift agreement. The donor would not have been willing to
transfer the properties without requiring any section 2035(b)
estate tax liability to be satisfied.
   Any hypothetical recipient of the properties who assumed
the liabilities would insist on a reduction of the purchase
price to reflect his or her assumption of any section 2035(b)
estate tax liability. A similar reduction for valuation pur-
poses is made when a donor makes a gift of his or her
interest in an entity with built-in capital gains. See Estate of
Davis v. Commissioner, 110 T.C. 530. In Eisenberg v.
Commissioner, 155 F.3d 50, 51–52 (2d Cir. 1998), vacating
and remanding T.C. Memo. 1997–483, the taxpayer trans-
(184)            STEINBERG v. COMMISSIONER                  195


ferred stock in a C corporation to her children. When she val-
ued the stock for gift tax purposes, she reduced the net asset
value of the corporation by the amount of the capital gains
tax that she would have incurred if the corporation had liq-
uidated, sold, or distributed its assets. Id. at 52. The
Commissioner challenged that reduction and argued that as
a matter of law a willing buyer would not consider the built-
in capital gains tax liability in the valuation analysis. Id.
   The Court of Appeals for the Second Circuit applied the
‘‘willing buyer/willing seller’’ test and held that the stock’s
value should be reduced to account for the built-in capital
gains tax liability. Id. at 59. The Court of Appeals found that
when negotiating the value of corporate shares, a willing
buyer would demand a discount for potential capital gains
tax liability, even if no liquidation, sale, or distribution was
contemplated at the time of the transfer. Id. at 57–58.
Because a willing buyer would insist upon such a discount,
the court held that it must be reflected in the value of the
property transferred. Id. at 57.
   The Court of Appeals’ reasoning in Eisenberg has been
adopted by other Courts of Appeals. See Estate of Jelke v.
Commissioner, 507 F.3d 1317 (11th Cir. 2007), vacating and
remanding T.C. Memo. 2005–131; Dunn v. Commissioner,
301 F.3d 339 (5th Cir. 2002), rev’g T.C. Memo. 2000–12;
Estate of Jameson v. Commissioner, 267 F.3d 366; Estate of
Welch v. Commissioner, 208 F.3d 213 (6th Cir. 2000), rev’g
T.C. Memo. 1998–167. The Commissioner subsequently
acquiesced to the Eisenberg decision. See AOD 1999–01,
1999–1 C.B. xix (Jan. 25, 1999).
   Similar reasoning has been applied in other contexts. See
Estate of Hall v. Commissioner, 92 T.C. 312, 338–339 (1989)
(recognizing that transfer restrictions on corporate stock
would reduce the fair market value of the stock); Estate of
Desmond v. Commissioner, T.C. Memo. 1999–76, slip op. at
13; Sackett v. Commissioner, T.C. Memo. 1981–661 (recog-
nizing that a reasonably informed purchaser would give
serious consideration to the liabilities of a business that he
or she was purchasing).
   The daughters’ assumption of the section 2035(b) estate
tax liability is a detriment to the daughters because it might
result in reductions in the values of the gifts they received
if the donor died within three years of the gifts. As in
196         145 UNITED STATES TAX COURT REPORTS              (184)


Eisenberg a hypothetical willing buyer of the properties
would recognize that to obtain the properties transferred, he
or she would need to assume both the gift tax liability and
the section 2035(b) estate tax liability and would demand
that the price be reduced to account for both of the liabilities.
  2. Benefit to the Donor
   The estate depletion theory of gift tax can be applied to
determine what constitutes consideration in money or
money’s worth. Under the estate depletion theory, a donor
receives consideration in money or money’s worth only to the
extent that the donor’s estate has been replenished. See
Commissioner v. Wemyss, 324 U.S. at 307–308; 2 Randolph
E. Paul, Federal Estate and Gift Taxation, para. 16.14, at
1114–1115 (1942). The Paul treatise, cited twice with
approval by the Supreme Court in Wemyss, further notes:
‘‘The consideration may thus augment * * * [the donor’s]
estate, give * * * [the donor] a new right or privilege, or dis-
charge him from liability.’’ Paul, supra, at 1115. Thus, the
benefit to the donor in money or money’s worth, rather than
the detriment to the donee, determines the existence and
amount of any consideration offset in the context of an other-
wise gratuitous transfer. See Commissioner v. Wemyss, 324
U.S. at 307–308.
   Under Federal tax law the cost of any section 2035(b)
estate tax liability is generally borne by the donor’s estate
and not the donee of the gift. See secs. 2001, 2002, 2035(b),
2501. When petitioner made the gifts to her daughters, peti-
tioner accrued both gift tax liability and the potential section
2035(b) estate tax liability. When the daughters assumed the
gift tax liability, petitioner’s assets were relieved of the gift
tax liability and therefore her estate was replenished. Like-
wise, when the daughters assumed the section 2035(b) estate
tax liability, petitioner’s estate was relieved of that estate tax
liability. This assumption, which we held in Steinberg I may
be reducible to a monetary value, has replenished petitioner’s
assets. Steinberg I, 141 T.C. at 280.
   The daughters’ assumption of the section 2035(b) estate
tax liability might relieve petitioner’s estate of a portion of
its estate tax liability. If petitioner died within three years
of the gift, her estate would have recourse against the daugh-
ters. Accordingly, the willing buyer would demand that the
(184)            STEINBERG v. COMMISSIONER                  197


price of the properties be reduced to account for the section
2035(b) estate tax liability.
  B. Apportionment Clause
   Respondent argues that the daughters’ assumption of the
section 2035(b) estate tax liability in the net gift agreement
did not create any new burden on the daughters or benefit
for petitioner because the daughters would have had to bear
the burden of the section 2035(b) estate tax liability either
under New York law or as beneficiaries of petitioner’s resid-
uary estate.
   We disagree with respondent’s assertion that the net gift
agreement duplicates New York law. Respondent’s argument
is based on a New York State statute entitled ‘‘Apportion-
ment of federal and state estate or other death taxes; fidu-
ciary to collect taxes from property taxed and transferees
thereof ’’. See N.Y. Est. Powers & Trusts Law sec. 2–1.8
(McKinney 2012). The statute provides that a fiduciary may
be required to pay estate tax with respect to any property
required to be included in the gross estate unless the testator
otherwise directs in his or her will that an amount of the tax
shall be equitably apportioned among the persons interested
in the gross estate to whom property is disposed of, in which
case those benefited shall contribute the amounts appor-
tioned against them. Id. sec. 2–1.8(a).
   At the time of the gifts at issue it was not possible to
determine whether N.Y. Est. Powers & Trusts Law sec.
2–1.8 would apply to this case. When the gifts were made on
April 17, 2007, the donor was still alive and entirely capable
of changing her domicile before her death. There was the
possibility that the law of a State other than New York
would apply to her estate. See Estate of McCoy v. Commis-
sioner, T.C. Memo. 2009–61 (discussing apportionment under
Utah law).
   At the time of the gifts at issue it was also not possible to
determine the provisions of the donor’s will that would exist
at the time of her death. As matter of law the donor is enti-
tled to change the provisions of her will before her death.
There is no certainty that her four daughters would be the
beneficiaries of her will. In the past the donor had made
changes to her will which at one point excluded one of the
daughters as a beneficiary. At the time petitioner and her
198         145 UNITED STATES TAX COURT REPORTS             (184)


daughters signed the net gift agreement, there was no guar-
anty that the daughters would remain beneficiaries under
petitioner’s residuary estate. Petitioner is still alive and
remains free to change her will at any time. The net gift
agreement guaranteed that the daughters would assume the
section 2035(b) liability. This guaranty placed a burden on
the daughters that they may not have had to otherwise bear.
   The will in effect at the donor’s death may provide specific
provisions regarding the payment of the estate tax and the
apportionment among beneficiaries and donees. The appor-
tionment statute is a default provision. See In re Walrod, 901
N.Y.S.2d 911 (Sur. 2009).
   Because on the date of the gifts it was not certain that the
law of New York or any other State would require the donees
to pay ratable shares of the estate tax that might be incurred
under section 2035(b) on the gift tax paid with respect to the
gifts, the provision of the net gift agreement that required
the donees to pay those shares was not duplicative or illu-
sionary.
   The operation of the net gift agreement can be distin-
guished from the operation of the New York statutes. The
net gift agreement provided an enforcement mechanism to
recoup the section 2035(b) estate tax incurred out of the
property transferred. New York law is silent on how a per-
sonal representative can recoup section 2035(b) estate tax
from a donee.
   For all these reasons, respondent’s ‘‘estate depletion’’ argu-
ment does not persuade us that the obligation assumed by
petitioner’s daughters to pay the section 2035(b) estate tax
adds zero value to petitioner’s estate because that obligation
is an obligation the daughters would have borne anyway
under the New York apportionment statute. Because of fac-
tual uncertainties as to whether and how the New York
apportionment statute would apply at petitioner’s death, the
daughters’ contractual assumption of this tax liability gave
rise to a new asset that could be deployed effectively by the
executor. This new asset ‘‘augmented’’ or ‘‘replenished’’ peti-
tioner’s estate. See Commissioner v. Wemyss, 324 U.S. at
307–308; Paul, supra, at 1115.
   Conceivably, the value of this new asset might not be pre-
cisely equal to the actuarial value of the contingent estate
tax liability that the daughters assumed. But the record con-
(184)            STEINBERG v. COMMISSIONER                  199


tains no expert testimony that would support a value lower
than that. Nor does respondent contend that uncertainties
surrounding the application of the New York apportionment
statute render the value of the daughters’ contractual
assumption ‘‘too speculative’’ to be considered for Federal gift
tax purposes. Quite the contrary: Respondent concedes that
whether ‘‘the section 2035(b) estate tax liability is too specu-
lative * * * is not an issue in this case.’’
  At the time petitioner and her daughters signed the net
gift agreement there was no guaranty that the daughters
would remain beneficiaries under petitioner’s residuary
estate. Petitioner was still alive and remained free to change
her will at any time. The net gift agreement guaranteed that
the daughters would assume any section 2035(b) liability.
This guaranty placed a burden on the daughters that they
might not have had to otherwise bear.
  C. Arm’s Length and Ordinary Course of Business
   Transactions within a family group are subject to special
scrutiny, and the presumption is that a transfer between
family members is a gift. Harwood v. Commissioner, 82 T.C.
239, 258 (1984), aff ’d without published opinion, 786 F.2d
1174 (9th Cir. 1986). Respondent contends that the daugh-
ters’ assumption of the section 2035(b) estate tax liability
was itself a gift because (1) the net gift agreement was
between family members and (2) the net gift agreement was
not in the ordinary course of business. Respondent further
claims that no part of the net gift agreement, presumably
including the daughters’ assumptions of the gift tax liability
and the section 2035(b) estate tax liability, was ‘‘bona fide,
at arm’s length, and free from any donative intent’’.
   In Steinberg I we rejected respondent’s claim that a
transfer between family members is necessarily a gift unless
it was in the ordinary course of business. A transfer between
family members that is not in the ordinary course of business
may still avoid gift tax to the extent it is made for consider-
ation in money or money’s worth. Pursuant to section
25.2512–8, Gift Tax Regs., a transfer made in the ordinary
course of business is necessarily a transfer made for consid-
200          145 UNITED STATES TAX COURT REPORTS                     (184)


eration; 5 however, not all transfers made for consideration
are made in the ordinary course of business. Section
25.2511–1(g)(1), Gift Tax Regs., distinguishes the two: ‘‘The
gift tax is not applicable to a transfer for a full and adequate
consideration in money or money’s worth, or to ordinary busi-
ness transactions’’. (Emphasis added.) Thus, a transfer not in
the ordinary course of business may still avoid gift tax to the
extent it is made for full and adequate consideration, regard-
less of whether the transfer was between family members.
   Additionally, as we pointed out in Steinberg I, respondent’s
argument is undermined by respondent’s concession that the
donees’ assumption of gift tax liability is not subject to gift
tax. See also Rev. Rul. 75–72, 1975–1 C.B. 310 (providing an
algebraic formula for determining the amount of gift tax
owed on a net gift). The daughters’ assumption of gift tax
liability was a transfer between family members and was not
made in the ordinary course of business, but respondent con-
cedes that it was consideration in money or money’s worth
given in exchange for petitioner’s gifts.
   Nothing in the record indicates that the net gift agreement
was not bona fide or not made at arm’s length. Petitioner
and her daughters were represented by separate counsel, and
the net gift agreement was the culmination of months of
negotiation.
V. Fair Market Value of the Daughters’ Promise To Pay
   Since we find that the daughters’ promise to pay any Fed-
eral or State estate tax liability that might arise under sec-
tion 2035(b) if petitioner died within three years of the net
gift agreement should be considered in determining the fair
market value of the gift, we need to decide what effect the
promise has on the fair market value of the gift. Petitioner
submitted an expert report that calculates the value of the
daughters’ assumption of the section 2035(b) liability to be
$5,838,540. Respondent did not submit an expert report.

  5 ‘‘[A]
        sale, exchange, or other transfer of property made in the ordinary
course of business (a transaction which is bona fide, at arm’s length, and
free from any donative intent), will be considered as made for an adequate
and full consideration in money or money’s worth.’’ Sec. 25.2512–8, Gift
Tax Regs.
(184)               STEINBERG v. COMMISSIONER                            201


  A. Petitioner’s Expert
  Petitioner’s expert was William Frazier, a professional
appraiser and managing director of Stout Risius Ross, Inc.
He has over 20 years of experience, has performed hundreds
of appraisals, and has earned the designation of accredited
senior appraiser with the American Society of Appraisers.
  The Frazier report began by establishing the gross value of
the gifts that petitioner transferred to the daughters under
the net gift agreement. Mr. Frazier testified that he used the
$109,449,307 gross value calculated in the appraisals that
petitioner submitted with her gift tax return.
  The report used the methodology described in section 2512,
section 25.2511–1, Gift Tax Regs., and Rev. Rul. 75–72,
supra, to calculate the gift tax liability that the daughters
assumed under the net gift agreement. The report calculated
the gift tax liability to be $32,012,711.
  Next the report calculated the value of the section 2035(b)
estate tax liability. Mr. Frazier testified that he used the
actuarial tables promulgated by the Commissioner to cal-
culate the probability that petitioner would die within each
of the three years after the date of the net gift agreement. 6
The report calculated petitioner’s annual mortality rate for
year 1, year 2, and year 3 to be 13.84%, 13.04%, and 12.13%,
respectively. The report used the section 7520 interest rate
applicable on the date of the transfer to determine the
present value factors for each of the three years. Then the
report took the effective State and Federal estate tax rates
for each of the three years and multiplied them by the gift
tax included in the estate under section 2035(b). Using this
methodology, the report calculated that the daughters’
assumption of the section 2035(b) estate tax liability reduced
the value of the combined gift by $5,838,540.
  We note that the Court of Appeals for the Fifth Circuit
accepted Mr. Frazier’s methodology for determining the value
of property transferred pursuant to a net gift arrangement in
Succession of McCord v. Commissioner, 461 F.3d 614 (5th
Cir. 2006), rev’g 120 T.C. 358 (2003). We find Mr. Frazier’s
methodology to be persuasive.
  6 Mr. Frazier used Life Table 90CM promulgated by the Commissioner

in sec. 20.2031–7(d)(7), Estate Tax Regs., for transfers made after April 30,
1999.
202        145 UNITED STATES TAX COURT REPORTS             (184)


  B. Respondent’s Arguments
  Respondent did not call an expert witness to rebut the
Frazier report. Rather, respondent raised two concerns with
Mr. Frazier’s methodology.
  1. Contingencies Considered by Mr. Frazier
   Respondent argues that Mr. Frazier’s analysis is flawed
because it fails to consider contingencies such as petitioner’s
health and general medical prognosis. Mr. Frazier took the
possibility of petitioner’s death within three years of exe-
cuting the net gift agreement into account because the
daughters’ liability for the section 2035(b) estate tax is
contingent on that possibility. Mr. Frazier used the Commis-
sioner’s own mortality tables to do so.
   The most common way to measure the value of a property
interest that is dependent on the life expectancy of an indi-
vidual is to use the Commissioner’s actuarial tables. See, e.g.,
Estate of Van Horne v. Commissioner, 720 F.2d 1114, 1116–
1117 (9th Cir. 1983) (obligation based upon the life of an
individual), aff ’g 78 T.C. 728 (1982); see also Estate of Green
v. Commissioner, 22 T.C. 728 (1954) (remainder interests in
trusts). The actuarial tables are favored in part because they
‘‘provide a needed degree of certainty and administrative con-
venience in ascertaining property values.’’ Estate of Van
Horne v. Commissioner, 720 F.2d at 1116 (quoting Bank of
Cal. v. United States, 672 F.2d 758, 760 (9th Cir. 1982)).
   Respondent contends that Mr. Frazier should have also
considered petitioner’s health and general medical prognosis.
The Commissioner’s mortality tables necessarily take some
account of a person’s health and general medical prognosis
when arriving at a probability of death. Respondent has not
pointed to any specific facts or circumstances that would jus-
tify special consideration of petitioner’s health or general
medical prognosis beyond use of the mortality tables, and the
evidence does not suggest that the tables produce an
unreasonable result. Cf. Huntington Nat’l Bank v. Commis-
sioner, 13 T.C. 760, 772 (1949) (stating that we deviated from
use of the mortality table because the elderly widow’s health
was poor).
(184)            STEINBERG v. COMMISSIONER                    203


  2. Section 7520 Rates
   Respondent also contends that Mr. Frazier incorrectly
applied section 7520 rates as the discount factor in calcu-
lating the value of the daughters’ assumption of the contin-
gent estate tax liability. Specifically, respondent contends
that the section 7520 rates are not applicable here because
they apply only to annuities, life interests, terms of years,
remainders, and reversionary interests.
   Mr. Frazier calculated the present value (the value on the
day that the parties signed the net gift agreement) of the
daughters’ potential liability to make a payment to peti-
tioner’s estate in one of the subsequent three years. The fact
that the payment is contingent rather than certain does not
preclude use of the section 7520 rates. It simply requires
adjusting the value of the payment to take into account the
likelihood of the contingency. Mr. Frazier did account for the
contingency by using the Commissioner’s actuarial tables.
Respondent has not persuaded us that there was a more
appropriate method that should have been used. We conclude
that the valuation was proper.
VI. Conclusion
  We conclude that in the circumstances present in this case
a hypothetical willing buyer and willing seller would take
into account the daughters’ assumption of section 2035(b)
estate tax liability in arriving at a sale price. We further con-
clude that the daughters’ assumption of section 2035(b)
estate tax liability reduces the value of petitioner’s gift to the
daughters by $5,838,540.
  Any contentions we have not addressed are irrelevant,
moot, or meritless.
  To reflect the foregoing,
                          Decision will be entered for petitioner.

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