Donees of Gifts Within 3 Years of Death Responsible for Estate Tax Attributable to Inclusion of Gift Tax Paid

At issue in Matter of Rhodes, __ Misc.3d __, __ N.Y.S.2d __, 2008 NY Slip Op 28472 (Sur. Ct. Westchester Co. 2008), was whether donees of gifts made within three years of death are responsible for paying estate tax attributable to the inclusion of the gift tax paid on such transfers

Prior cases (Matter of Meltzer, 176 AD2d 15 [1992]; Matter of Coven, 148 Misc 2d 132 [1990]) had held that since the gifts themselves do not form a part of decedent's "gross tax estate" because such gifts are added after the tax computation schedule. Concerning the gift tax paid, the Surrogate noted that unlike adjusted taxable gifts which are added to the tax calculation in a separate step after the gross estate has been determined, the gift taxes paid are a component of the gross estate as defined by IRC 2035 (and thus for application of EPTL 2-1.8) and as such are subject to tax apportionment. Accordingly, the Court held that the donees of the gifts made within three years of decedent's death are responsible for paying their ratable share of the estate tax attributable to the inclusion of the gift tax paid. A secondary issue was whether the donees would be responsible for paying any additional gift tax if imposed by the IRS following the audit of the gift tax return. The Surrogate directed that this shall be addressed in a proceeding to determine its validity or as an incident to a judicial accounting.