The Tax Court on Monday held that the amount of gift tax paid by the doness of deemed gifts of a remainder interest in QTIP property is includable in the decedent's gross estate under § 2035(b). Estate of Morgens v. Commissioner, 133 T.C. No. 17 (Dec. 21, 2009):

Creating an exception from § 2035(b) for gift tax paid with respect to deemed transfers of QTIP, as the estate invites us to do, would frustrate the purpose of § 2035(b). …

Congress enacted § 2035(b) to eliminate an incentive for deathbed gifts. Because of § 2035(b), the donor’s estate must include in the estate tax base the gift tax paid by the donor with respect to gifts made within 3 years of death. An exception from § 2035(b) for gift tax paid on QTIP transfers would encourage transfers of QTIP in contemplation of the surviving spouse’s death, which is inconsistent with the goal of § 2035(b). For example, if the surviving spouse held QTIP until death, the entire QTIP would be included in her estate tax base. § 2044. However, as in the net gift context, if § 2035(b) did not apply, by triggering a disposition of QTIP inter vivos, the surviving spouse could permanently remove the gift tax due on the transfer of QTIP from her transfer tax base. This is inconsistent with Congress’ goal of treating alike transfers at death and transfers in contemplation of death. Interpreting § 2035(b) as inapplicable to gift tax paid by donees of QTIP in satisfaction of the surviving spouse’s liability would completely undermine the purpose of § 2035(b) in the context of QTIP because the literal reading of § 2035(b) would allow the surviving spouse to easily circumvent the purpose of § 2035(b).

We recognize the limited economic nature of the interest in QTIP held by the surviving spouse. Nevertheless, the QTIP election that the executor of the estate of the first spouse to die may make carries both benefits and burdens for both spouses and their estates. Inclusion of the gift tax paid with respect to a § 2519 transfer in the surviving spouse’s gross estate is one such burden if the transfer occurs within 3 years of his or her death. Without a clear legislative mandate to except gift tax liability of the surviving spouse on § 2519 transfers from the application of § 2035(b), we shall not infer such an exception.