The Tax Court in Brief May 24 – May 28, 2021
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Tax Litigations: The Week of May 24 – May 28, 2021
Tax Court Case: Estate of Grossman v. Comm’r, T.C. Memo. 2021-65
Tax Dispute Short Summary:
This fact pattern travels the world to reach its conclusion in the U.S. Tax Court. The estate of a decedent (“H”) petitioned the Tax Court after the Internal Revenue Service challenged the authenticity of the H’s widow as the “surviving spouse.” H married three times. H and his first wife (W1), both Jewish and New York residents, married in New York and had two children. After a decade of marriage, the couple separated. Soon after, H began a new relationship with a woman (W2), who was not Jewish. H traveled to Mexico to obtain a unilateral divorce from W1.
Upon returning to the U.S. with a divorce under the laws of Mexico, H and W2 participated in a civil marriage ceremony in New Jersey and had two children. Several years later, H and W2 ended their relationship. W1 filed suit against H and W2 seeking to null and void the Mexican divorce. W1 succeeded, with the Court finding that H’s and W1’s marriage was not legally dissolved by a Court of competent jurisdiction and thus, nullifying and voiding the marriage between H and W2.
After more than a decade, H became engaged to W3, who was Jewish. Before their marriage, H and W1 obtained a religious divorce under rabbinical law. H and W3, also, traveled to Israel and obtained an “allowance” to marry. Subsequently, the couple married in Israel in a traditional Orthodox Jewish religious ceremony. H and W3 returned to New York, where they lived for nearly three decades and had two children. The couple remained married until H’s death. W3 took a marital deduction under section 2056(a). The Internal Revenue Service denied the deduction, claiming that W1 was the proper “surviving spouse” under New York law.
Tax Litigation Key Issues:
- Whether the “third spouse” is the surviving spouse of decedent for purposes of the estate tax marital deduction provided by Sec. 2056(a)?
- The Tax Court held that W3 was the proper “surviving spouse” for purposes of Sec. 2056(a) because New York courts have accepted legally recognizable marriages outside of the State as recognized within the State. The Court noted the narrowness of this opinion as it applies to these facts and application of Israeli law.
Key Points of Law:
- The purpose of summary judgment is to expedite litigation and avoid costly, time-consuming, and unnecessary trials. Peach Corp. v. Comm’r, 90 T.C. 678, 681 (1988). The Court may grant summary judgment when there is no genuine dispute as to any material fact and a decision may be rendered as a matter of law. Sundstrand Corp. v. Comm’r, 98 T.C. 518, 520 (1992), aff’d, 17 F.3d 965 (7th Cir. 1994). In deciding whether to grant summary judgment, Courts construe factual materials and inferences drawn from them in the light most favorable to the nonmoving party. Id. at 520.
- Section 2001(a) imposes a tax on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States. Section 2056(a) provides that, for purposes of the tax imposed by section 2001, the value of the taxable estate shall be determined by deducting from the value of the gross estate an amount equal to the value of any interest in property which passes or has passed from the decedent to his surviving spouse.” Put differently, if an interest in property passes to the decedent’s “surviving spouse,” the decedent’s estate generally avoids paying tax with respect to the value of that interest. See Estate of Morgens v. Comm’r, 133 T.C. 402, 409-410 (2009) (“The policy behind the marital deduction rule is that property passes untaxed from the first spouse to die to his or her surviving spouse but is then included in the estate of the surviving spouse.”), aff’d, 678 F.3d 769 (9th Cir. 2012).
- The Tax Court has held that the identification of a decedent’s surviving spouse is a Federal issue that should be determined by applying State law – typically, the law of the State where the decedent’s estate is administered. See Estate of Goldwater v. Comm’r, 64 T.C. 540, 550 (1975) (“In our view the congressional intent in enacting section 2056 was that the term ‘surviving spouse’ refers to the same person who is the surviving spouse under the law of the State in which the decedent’s estate is being administered.”), aff’d, 539 F.2d 878 (2d Cir. 1976); see also Estate of Steffke v. Comm’r, 64 T.C. 530, 534 (1975) (“Marriage, its existence and dissolution, is particularly within the province of the States.”), aff’d, 538 F.2d 730 (7th Cir. 1976). If the courts of the relevant State have ruled on the validity of the marriage at issue, we generally will follow those rulings. See Estate of Steffke, 64 T.C. at 538; see also Estate of Goldwater, 539 F.2d at 880. Rulings from other States, however, do not necessarily bind us. See Estate of Spalding v. Comm’r, 537 F.2d 666, 668 (2d Cir. 1976)
Although the Tax Court’s decision provides limited application based on the facts, the overall theme – check the state’s laws and interpretations – reminds tax practitioners and the IRS to check the state law and its state interpretation. The application of the Code to spouse-related issues begins at the state level with an understanding whether a state recognizes a particular arrangement of marriage or divorce.
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