# UNITED STATES TAX COURT

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## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

T.C. Memo.

1994-234

UNITED STATES TAX COURT

ROBERTA SCHREIBER ULMER, ET AL., Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos.

12602-91, 14026-91.,
14348-91, 14349-91.

Filed May 26, 1994.

R determined that the Estate of C (EC) was liable
for gift and estate taxes that arose from alleged gifts
made by C to C's children, petitioner R (PR) and
petitioner M (PM), during the taxable period ending
June 30, 1979. Sec. 2501, I.R.C. Specifically, R
asserts that C entered into an enforceable contract to
make gifts to PR. PR denies that C was obligated to
transfer property under New York law. R also asserts
that C sold an interest in the family business to PM
for less than adequate consideration. PM argues that
adequate consideration was provided for the transfer of
the business interest. R has also asserted that PR and
PM are liable as transferees for gift taxes owed due to
taxable transfers during that period. Sec. 6324(b),
I.R.C. R also asserts that EC is liable for a fraud
penalty pursuant to sec. 6653(b), I.R.C.
Cases of the following petitioners are consolidated
herewith: Roberta Schreiber Ulmer, docket No. 12602-91; Marvin

Rosenblatt, docket No. 14026-91; Estate of Cecil Rosenblatt,
Deceased, Roberta Schreiber Ulmer, Hannah Goldstein, and Iris
Gruenebaum, Administratrices, C.T.A., c/o Matthew F. Sarnell,
Esq., docket Nos. 14348-91 and 14349-91.

SERVED MAY 2 61994

1. Held: EC is not liable for gift tax owed for
a transfer of property from C to PM during the period
in issue. No gift tax liability arose because the
promised transfer did not occur during that period.
2. Held, further, EC iS not liable for gift tax
owed for gifts made by C to 040R
during the period in
issue. No gift tax liability arose because C was not
obligated under New York lawito make transfers to PR
during that period.
3. Held, further, PR is not liable as a
transferee under sec. 6324(b), I.R.C.
4. Held, further, PM is not liable as a
transferee under sec. 6324(b), I.R.C.
5. Held, further, EC is not liable for a fraud
penalty pursuant to sec. 6653!(b), I.R.C., because R has
not carried her burden of prqving liability.
Ru.le 142(b), Tax Court Rules of Practice and Procedure.

Matthew F. Sarnell, Stanley L. Kantor, Gregory A. Robinson,
and Melvin Paradise, for petitioners.
Frances Ferrito Regan and Pamela L. Cohen, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

HALPERN, Judcre:

Respondent has determined deficiencies in

both estate tax and gift taxes, and additions to tax in
connection with the gift taxes, against petitioner Estate of

Cecil Rosenblatt, Deceased, Roberta Schreiber Ulmer, Hannah
Goldstein, and Iris Gruenebaum, Administratrices, C.T.A. (the
Estate).

Respondent has also determined that petitioners Roberta

Schreiber Ulmer (Roberta) and Marvin Rosenblatt (Marvin) are
liable as transferees of the property of Cecil Rosenblatt (Cecil)

- 3 for a deficiency in gift tax, and for an addition to tax, for the
calendar quarter ended June 30, 1979.

Because these cases

involve common questions of fact, they have been consolidated for
trial, briefing, and opinion.

The deficiency in estate tax determined by respondent
against the Estate in docket No. 14349-91 is $187,490.73.
The deficiencies in gift tax and additions to tax determined
by respondent against the Estate in docket No. 14348-91 are as
follows:
Period Ending

Gift Tax

June 30, 1979
December 31, 1979
June 30, 1980
September 30, 1980
December 31, 1980
March 31, 1981
June 30, 1981
December 31, 1981
December 31, 1982
December 31, 1984

$1,751,979.70
3,393.00
18,217.50
17,360.71
1,332.50
41,650.00
45,488.95
84,706.04
87,633.85
31,375.30
2,083,137.55

Total

Additions to Tax
6653(b)2

$875,989.85
1,696.50
9,108.75

8,680.36
666.25
20,825.00
22,744.48
42,353.02
43,816.93
15,687.65
1,041,568.79

The liability as a transferee determined by respondent
against Roberta in docket No. 12602-91 is $600,000.

2

I.R.C., sec. 6653(b) was amended by the Tax Equity and
Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-248,
sec. 325(a), 96 Stat. 324, 616. The TEFRA version of sec.
6653(b) modified the calculation of the fraud addition. The
statutory notices with respect to the periods ending Dec. 31,
1982, and Dec. 31, 1984 (after the effective date of TEFRA), do
not expressly indicate whether respondent used the post-TEFRA
formulation. Since the parties have settled the issues regarding
those years, we assume that the parties have taken into account
any relevant changes in the law. All citations to sec. 6653 are
intended to refer to that section as effective during the
relevant period(s) in issue.

.

- 4 The liability as a transfere

determined by respondent

against Marvin in docket No. 14026-91 is $1,800,000.
The parties have settled numerous issues and have left for

our decision only the ramificatio s of certain events occurring
during June 1979.

Unless otherwise noted, all section references are to the
Internal Revenue Code in effect for the taxable period in issue,
and all Rule references are to the Tax Court Rules of Practice
and Procedure .
FINDINGS OF FACT

Some facts have been stipulated and are so found.

The

stipulation of facts filed by the parties and accompanying
exhibits are incorporated herein by this reference.
Residences
At the time the petitions in

hese cases were filed, the

residence of Marvin was in New Yor , New York, and the residence
of Roberta was in Baltimore, Maryland.
The Family

Cecil was the wife of William Rosenblatt, deceased
(William).

Their children were Marvin, Roberta, Hannah Goldstein

(Hannah), and Iris Gruenebaum (Iris) (collectively, the
children).

Cecil died on May 12, 1986.

William's Death
William predeceased Cecil, dying on January 31, 1977.

At

the time of William's death, he owned a 90-percent interest in
the William Rosenblatt partnership (WR), and Marvin owned the

- 5 remaining 10-percent interest.

The business of WR was to

purchase and sell unmounted diamonds and to create diamond
jewelry for sale to various jewelry dealers and retailers.

William died testate.

Pursuant to his last will and

testament (the will), William made the following bequests:
bequeathed $10,000 to each of the children.

He

He also bequeathed

$60,000 in trust for the benefit of each of Roberta, Hannah, and
Iris (but not Marvin).3

He bequeathed a portion of the residue

of his estate outright to Cecil.

He bequeathed the remaining

portion in trust (the residuary trust) for the benefit of Cecil

and the children.
Cecil had a life interest in the residuary trust.

She also

had a particular power to appoint trust assets to the children.
The children were to share in the remainder of the residuary
trust on the death of Cecil.
Renunciations

Following William's death, in April 1977, each of the
children renounced his or her interest in the residuary trust and
Roberta, Iris, and Hannah each renounced her interest in the

$60,000 bequeathed in trust for her benefit.

The residuary trust

was neither established nor funded, and the entire residue of
William's estate passed outright to Cecil.

William's partnership

The will explains William's failure to make such a bequest
to Marvin by stating that Marvin had been assisted in
establishing himself in his own business and was a partner with
his father in the William Rosenblatt partnership, from which he
would draw a salary until the assets of that business were
liquidated.

- 6 interest in WR was included in thè residue.

That interest was

valued on the estate tax return for William's estate at $632,607.
That amount was accepted after audit of the return by the
Internal Revenue Service.
In consideration of Marvin's renunciation of his interest in
the residuary trust, he received an additional 11.25-percent
interest in WR, which increased his interest to 21.25 percent.

Successor Partnership
In January 1978, Cecil and Marvin formed a partnership under
the name of William Rosenblatt (WR2) to continue the business of

WR.

The initial capital of WR2 consisted of the net worth of WR.

That capital was shown in the WR2 partnership agreement (the
partnership agreement) as having béen contributed 78.75 percent
by Cecil and 21.25 percent by Marvin.

The partnership agreement

provided that, initially, Cecil was to have a 90-percent interest
in the profits and losses of WR2 and Marvin was to have a
10-percent interest.

The partnership agreement further provided

that, beginning in the second year of the partnership, and
concluding in the fifth year of the partnership, Cecil's interest
in profits and losses was to be decreased (in 10-percent

increments, annually), and Marvin's increased (similarly), until
each was to receive 50 percent of profits and losses.
In June 1978, Marvin's interest in the capital of WR2 was
increased from 21.25 percent to 28.37 percent in consideration of

his contributing certain pieces of jewelry to the partnership.

- 7 The June 1979 Agreement and the Supplemental Agreement
On June 30, 1979, Cecil and Marvin entered into two
agreements, one an untitled three-page agreement (the June 1979
agreement) and the second a supplement thereto (the supplemental
agreement).

By way of the June 1979 agreement, Cecil and Marvin

agreed that (1) in consideration of receiving $270,000 from
Marvin, Cecil would sell to him a 46.63-percent interest in WR2
(increasing his capital interest therein from 28.37 percent to
75 percent) and (2) the partnership agreement would be modified,

as set forth.

In part the June 1979 agreement provides:
W I T N E S S E T H:

WHEREAS, the parties hereto did form a partnership
under the firm name WILLIAM ROSENBLATT * * *; and

*

*

*

*

*

*

*

WHEREAS, CECIL ROSENBLATT has agreed to sell to
MARVIN ROSENBLATT so much of her interest in the

partnership as shown on the books of the partnership as
of this date to enlarge MARVIN ROSENBLATT'S partnership

capital interest to 75% and reduce her capital interest
in the partnership to 25%, for $270,000
NOW, THEREFORE, in consideration of the mutual
covenants hereinafter set forth, it is agreed as
follows:

1.

CECIL ROSENBLATT agrees to accept, concurrent

with the signing hereof, the sum of $270,000.00 from
MARVIN ROSENBLATT for the sale by her to MARVIN

ROSENBLATT of a 46.63% interest in the partnership
doing business under the name WILLIAM ROSENBLATT, it
being agreed:
(a) That effective June 1, 1980, after
payment of the first promissory note provided
for in Subparagraph (d) of this paragraph,
the partnership interests of the parties
hereto and the division of net profits and
losses of the partnership shall be:

MARVIN ROSENBLATT
CECIL ROSENBLATT

75%
25%

(b) That after June 1, 1980, the net profits
and losses of the partnership shall be

divided * * * in accordance with the capital
interests as set forth in Subparagraph (a) of
this paragraph.

*

*

*

*

*

*

*

(d) The $270,000.00 purchase price shall be
evidenced by a series of five promissory
notes * * * The first four of said notes '
shall be in the sum of $50,000 each, payable
June 1, 1980, June 1, 1981, June 1,1982, and
June 1, 1983; the fifth note shall be in the
sum of $70,000, payable June 1, 1984.
The supplemental agreement provides:
SUPPLEMENTAL AGREEMENT TO AGREEMENT DATED
JUNE 30, 1979, BY AND BE 040WEEN
CECIL
ROSENBLATT AND MARVIN ROSENBLATT

With respect to the intetests of the parties over and
above their partnership interest in the firm conducted under
the partnership name of WILLIAM ROSENBLATT * * * the parties
agree as follows:
1.

With respect to the three daughters of

CECIL ROSENBLATT, to wit: ROBERTA, IRIS and HANNAH, it

is agreed that they will be paid out the balance due
them pursuant to the understanding made at the time of
the death of WILLIAM ROSENBLA T, by June 30,

1980, and

that after they are paid out the full amount which was
promised to them as aforesaid, no funds of the
partnership conducted under the name of WILLIAM
ROSENBLATT will be paid to any of the said daughters of
CECIL ROSENBLATT, except by m tual consent of the
parties hereto. If, after they have been paid out the
full amount promised to them, business funds of the
partnership conducted under the name of WILLIAM
ROSENBLATT are paid to any of the said girls without
the consent of MARVIN ROSENBLATT, such advances shall
be charged against the capital account of CECIL
ROSENBLATT in the said partnership.

2. MARVIN ROSENBLATT agrpes and does hereby renounce
any and all right he may have to contest the Last Will and
Testament of CECIL ROSENBLATT, his mother, it being agreed

- 9 and understood that CECIL ROSENBLATT shall have the right to
dispose of her Estate as she sees fit, without interference
or claims on the part of MARVIN ROSENBLATT.

Dated:

June 30, 1979

|sf
CECIL ROSENBLATT

|sf
MARVIN ROSENBLATT

The December 1979 Agreement
In December 1979, Cecil and Marvin entered into another
untitled agreement, whereby Cecil agreed to sell to Marvin her
remaining 25-percent interest in WR2 for $109,601.

The sale was

to be effective January 1, 1980, and Marvin was to pay for the
transfer by delivering to Cecil a series of promissory notes.
Also, Cecil agreed to waive paragraph 1(a) and (b) of the
June 1979 agreement, so that, effective January 1, 1980, all
profits and losses of WR2 would belong to Marvin.

Marvin's Notes
Before negotiating the June 1979 agreement and the

supplemental agreement, Marvin prepared a list of issues to be
taken up with Cecil.

Among the items on the list are:

Payout the girls within 9 months, by Dec. 31, 1979,
amount agreed upon.
* No further business funds to girls - except if
mutually agreed and that it reduces your equity.

Raise my percent of business to 75%, by Dec. 31, 1979,
by signed amendment to partnership agreement (the
payout of the girls represents over 50% of original
value of business without consideration for taxes, fees
and expenses)

* Thereafter, I may use all business funds as I choose.

* As previously agreed, all 'other' funds are mine, now
and in the future
You retain 25% of business,
ith the same buy-out
provisions of our partnership agreement, except that I

have the option for a total buyout after X (to be
determined) number of years.1
* You receive approximately $270, 000 - in cash or
short-term promissory notes secured by the business, by
Dec. 31, 1979 (to raise my equity to 75% of an assumed
business value of $600,000 of recent accounting record.
I must pay the difference between 75% of $600,000, or
$450,000, and the approximat ly 30%, or $180,000, which
I now possess $450,000 - 180,000 = $270,000)

The Ledger Cards
At the time of Cecil's death in 1986, three sets of ledger

cards (the ledger cards) were found in a locked cabinet among her
papers at WR2's offices.

Each set of ledger cards is titled

Roberta, Hannah, or Iris, respectively.

The entries on the

ledger cards were handwritten by Cecil.

The information

contained on the ledger cards is a tached to this report as an
appendix.

When summed, the amount

shown on the ledgers titled

"Roberta", "Iris", and "Hannah" tot;al $571,117, $574,473, and

$602,214, respectively.
OPINION

I.

Introduction

Many of the issues presented
have been settled by the parties.

n these consolidated cases
The remaining issues all turn

on our analysis of certain events occurring during June 1979.
Respondent maintains that, by virtue of two agreements entered
into by Cecil and her son, Marvin, in June 1979 (the June 1979
agreement and the supplemental agreement), Cecil made taxable

- 11 gifts to Marvin in the amount of $1,800,000 and to each of his
sisters, Roberta, Hannah, and Iris, in the amount of $600,000

apiece.

Respondent also maintains that the underpayment in gift

tax for the calendar quarter ended June 30, 1979 (the June 30
quarter), resulting from Cecil's failure to report such gifts,
was due to fraud.
and deny any fraud.

Petitioners deny that any such gifts were made
Marvin and Roberta are petitioners only

because respondent has determined that each is liable as a
transferee of the property of Cecil for the gift tax liability

(and addition to tax) for the June 30 quarter.
II.

Respondent's Determinations
In respondent's notice of deficiency issued to the Estate

with respect to the gift tax, respondent states simply that she
has determined that, during the June 30 quarter, Cecil (1) made a
gift of 50 percent of a jewelry business with a fair market value
of $1,800,000 to her son Marvin and (2) made cash gifts of

$600,000 (taking into account certain settled issues) to each of
her daughters, Roberta, Hannah, and Iris (collectively, the

daughters or sisters, as appropriate).

In her answer, at trial,

and on brief, it has become clear that respondent's determination
of gift tax liability for the June 30 quarter, is not as
straightforward as her notice of deficiency would suggest.
Respondent's determination is based on her assumption that the
jewelry business in question (WR2, a partnership business) was,
at the time of the claimed gifts, worth in excess of $3,600,000,
and that, by virtue of the June 1979 agreement and the

- 12 supplemental agreement, Cecil (1

made a bargain sale of a

portion of her interest in WR2 to Marvin for $1,800,000 less than
that portion was worth and (2) o ligated herself to pay $600,000
to each of her daughters.

We willl address, in turn, respondent's

determinations of gifts made by Cecil to (1) Marvin and (2) his

sisters.

Our decisions on those issues make it unnecessary for

us to address the valuation issue raised by respondent's
determinations.
III.

Gift to Marvin

A.

Introduction

During 1979, the gift tax wa

imposed for each calendar

quarter on the transfer of propert y by gift during that quarter.

Sec. 2501.
gifts.

Section 2512 concerns itself with the valuation of

In pertinent part, section1 2512 provides:

(a) If the gift is made in property, the value
thereof at the date of the gift shall be considered the
amount of the gift.
(b) Where the property is transferred for less
than an adequate and full con ideration in money or
money's worth, then the amount by which the value of
the property exceeded the valùe of the consideration
shall be deemed a gift, and shall be included in
computing the amount of gifts made during the calendar
quarter.

Respondent's position is simple:

On June 30, 1979, pursuant

to the June 1979 agreement, Marvin purchased from Cecil a
46.63-percent interest in WR2, paying for that interest

$1,800,000 less than it was worth.

As explained more fully

below, in section IV, respondent has determined that the interest
was worth $1,800,000 more than Marv n paid for it because

- 13 respondent believes that Cecil contemporaneously made an equal
gift to her daughters.
simple:

Petitioners' principal position also is

Marvin paid full value for the partnership interest,

thus negating the possibility of a gift.
B.

Analysis

Respondent's focus is on June 30, 1979.

Respondent argues

that, on that date, by virtue of the June 1979 agreement, Marvin
received a 46.63-percent interest in WR2 from Cecil.

As a

result, respondent claims that, had WR2 been liquidated at the
close of business on June 30, 1979, Marvin would have been
entitled to receive 75 percent of the capital of WR2:

Cecil transferred complete dominion and control of a
46.23% [sic.] interest in the capital account of WR2 to
petitioner Marvin on June 30, 1979. * * * If Cecil
had died between June 30, 1979 and June 30, 1980, the
assets of the partnership, after payments of debts to
other creditors, would have been distributed to
petitioner Marvin pursuant to the capital account. See
N.Y. Partnership L. § 71(c) (McKinney 1988).
We do not quarrel with respondent's interpretation of New York
partnership law.

We disagree, however, that, on June 30 1979,

pursuant to the June 1979 agreement, Cecil made a contemporaneous

transfer of any percentage of her partnership interest to Marvin.
The June 1979 agreement states that Cecil has agreed to sell
to Marvin so much of her interest in WR2 as "to enlarge MARVIN

ROSENBLATT'S partnership capital interest to 75% and reduce her
capital interest in the partnership to 25%".

In consideration of

the transfer of a 46.63-percent interest in WR2 to Marvin (to
increase his partnership interest to 75 percent), Marvin is

- 14 -

obligated to pay to Cecil $270,000, by delivering to her five
notes in that total amount.

Mary n's partnership interest in WR2

is not to increase to 75 percent immediately, however.

The

pertinent provision of the June 1 79 agreement is as follows:
That effective June 1, 1980, after payment of the first
promissory note provided for in Subparagraph (d) of
this paragraph, the partnership interests of the
parties hereto and the divis on of net profits and
losses of the partnership sh 11 be:
MARVIN ROSENBLATT
CECIL ROSENBLATT

75% 042
25%

[Emphasis added.]

Respondent recognizes the difficulty that paragraph 1(a)
presents to her.

She insists, however, that, contrary to the

inference to be drawn from that paragraph, Marvin's interest in

WR2 immediately increased to 75 percent.

She argues that:

"According to the Forms K-1 that were filed with WR2's federal
partnership return for the taxable year ending December 31, 1979,

the partnership reported that petitioner Marvin had a 75 percent

interest in the partnership's capital account and that Cecil had
only retained a 25 percent interes ."

Petitioners argue that respon ent has failed to take account
of another agreement entered into

etween Cecil and Marvin

subsequent to the June 1979 agreement and before the Forms K-1 in
question were filed.

Pursuant to t at agreement, entered into on

December 31, 1979 (the December 1979 agreement), among other
things,

(1) Cecil agreed to sell to Marvin her remaining

25-percent interest in WR2 and (2) Cecil waived paragraph 1(a) of

the June 1979 agreement.

That lastlprovision of the

- 15 -

December 1979 agreement, argues petitioner, would account for the
75-percent capital interest shown for Marvin on the Forms K-1.
The provision of the December 1979 agreement in question reads as

follows:
CECIL ROSENBLATT hereby waives the provisions of
Paragraphs (1)(a),(b),(c) and (e) of the June 30, 1979
Agreement between the parties, it being understood and
agreed that all profits and losses effective January 1,
1980 of the business hereafter conducted under the name
WILLIAM ROSENBLATT shall belong to MARVIN ROSENBLATT.

[Emphasis added.]

Because Cecil's waiver was not effective until January 1,

1980, we do not agree with petitioners that the December 1979
agreement adequately explains the entries on the 1979 Forms K-1.
Nevertheless, and although the Forms K-1 are some evidence to the
contrary, we find that Marvin's partnership (capital) interest in
WR2 did not increase from 25 percent to 75 percent on June 30,
1979.

In making that finding, we rely primarily on the June 1979

agreement, which we believe contemplates that Marvin's

partnership interest would remain at 25 percent until June 1,
1980, or later, if he were to default on the first promissory
note.

Such a delayed effective date makes sense to us when we

consider Marvin's notes made in anticipation of negotiating with
Cecil, Marvin's testimony, and the supplemental agreement.

As

discussed more fully in section IV, below, Marvin understood

that, before June 30, 1980, Cecil was free to withdraw money from
WR2 to meet certain obligations of hers to her daughters.

It is

clear to us that Marvin acknowledged the existence of that
obligation, but wanted it satisfied out of partnership assets

- 16 that he did not view as his.

Again as explained more fully

below, we view the delayed effective date provision as a method
both to allow and to control Cecil's use of partnership funds to
satisfy her obligation to her daug ters.

To the extent that the

Forms K-1 indicate that Marvin's interest in the capital of WR2

increased to 75 percent before Jan ary 1, 1980, we believe that
they are in error.

Respondent has asserted no theory with regard to the claimed
gift by Cecil to Marvin other than that, on June 30, 1979, as a
result of the June 1979 agreement, Marvin received a gift from
Cecil because Marvin's capital intërest in WR2 increased by
46.63 percent on that date.

In particular, respondent has not

argued that a transfer by gift constituted a binding promise to
transfer a capital interest to Marvin in the future.
theory would give rise to difficul

Such a

questions of valuation,

based, in part, on Cecil's control of her capital interest during

the interim.

Clearly, respondent k ows how to argue that a

binding promise constitutes a transfer by gift.

That is

precisely the argument that respond nt makes with regard to the
daughters.

Because respondent has

ot argued a gift by promise,

and because of the valuation difficulties presented, we will not
go beyond respondent's theory that

arvin's capital interest in

WR2 increased by 46.63 percent on J ne 30, 1979.

Having found

that, as a result of the 1979 agreement, Marvin's capital
interest in WR2 did not increase during the June 30 quarter, we
hold that there was no transfer by gift from Cecil to Marvin

- 17 during that quarter on account of the sale by Cecil to Marvin of
a 46.63-percent interest in WR2.
IV.

Gifts to the Daughters
A.

Introduction

Respondent has determined transfers by gift, by Cecil, of
$600,000 to each of the daughters during the June 30 quarter,
although respondent states on brief that payment of such amounts
occurred between August 1979 and the end of 1983.

Respondent

explains that seeming discrepancy by arguing that, in June 1979,
Cecil made a binding promise to make a gift, which itself
constitutes a transfer by gift.

We agree that a binding promise

to make a gift can constitute a transfer by gift for purposes of
section 2501; we do not agree, however, that such a binding

promise was made here.
B.

Promises to Make a Gift

The rule with regard to a promise to make a gift has been
well stated by the Court of Appeals for the Second Circuit, in
Rosenthal v. Commissioner, 205 F.2d 505, 509 (1953), revg. and
remanding 17 T.C. 1047 (1951):

"a binding promise to make a gift

becomes subject to gift taxation in the year the obligation is
undertaken and not when the discharging payments are made."

That

was the view of the Tax Court in Rosenthal v. Commissioner,
17 T.C. 1047 (1951), which was revd. and remanded by the Court of

Appeals for the Second Circuit, 205 F.2d 505 (2d Cir. 1953), to
determine whether the binding promise in question was made in
consideration of the release of the taxpayer from an earlier

- 18 -

binding promise.

See also Estate of Copley v. Commissioner,

15 T.C. 17, 20 (1950) (payments made in 1936 and 1944, pursuant
to a binding contract (an antenuptial agreement) entered into in

1931, were not taxable as gifts in 1936 and 1944), affd. 194 F.2d
364 (7th Cir. 1952).
C.

The Supplemental Agreement

Respondent finds binding promises to make gifts to the
daughters in the supplemental agreement.

The supplemental

agreement was entered into in congection with the June 1979

agreement, whereby, among other things, Cecil agreed to sell to
Marvin a 46.63-percent interest in WR2.

The pertinent language

of the supplemental agreement is as follows:

1.

With respect to the three daughters of

CECIL ROSENBLATT, to wit:

ROBERTA,

IRIS and HANNAH, it

is agreed that they will be paid out the balance due
them pursuant to the understanding made at the time of
the death of WILLIAM ROSENBLATT, by June 30, 1980, and
that after they are paid out the full amount which was
promised to them as aforesaid, no funds of the
partnership conducted under the name of WILLIAM
ROSENBLATT will be paid to any of the said daughters of
CECIL ROSENBLATT, except by mutual consent of the

parties hereto.

* * *

Neither the supplemental agreement nor the June 1979 agreement
spells out either (1) the understanding made at the time of the
death of William Rosenblatt or (2) any balance due pursuant
thereto.

Respondent has proposed

finding that there was an

agreement between Cecil and the children that she would
distribute to them the assets left in her control after the death
of William.

Based on the ledger cards found among Cecil's papers

after her death, respondent theorizes that the agreement was to

pay to each daughter $600,000 (and to Marvin $1,800,000).
Reading the supplemental agreement together with the June 1979
agreement, respondent concludes that the daughters are third
party beneficiaries of an agreement between Cecil and Marvin,
with an enforceable right to receive $600,000 apiece.
D.

The Daughters' Position

The daughters' position is clear:
While all of The Daughters received some financial
support or gifts from Decedent at times, which gifts
are the subject of settled issues in this case, none of
them ever received a promise of payment of $600,000.00
each and none of them ever received property or money
with value anywhere near $600,000.00.
While the daughters' position leaves open the possibility that

they were promised, and received, some amount (still
substantial), but nowhere near $600,000, we need not explore that
possibility.

The daughters challenge directly respondent's

fundamental premise that the supplemental agreement constituted a
binding promise to make gifts to them:

"The Supplemental

Agreement created no enforceable promise to transfer money or
property by gift to The Daughters, as third party beneficiaries,

as the promise was too vague and ambiguous to be enforceable."
Fundamentally, we agree with the daughters.
E.

Analysis
1.

Third Party Beneficiaries

The Court of Appeals for the Second Circuit (to which an

appeal in this case might lie) has recently summarized pertinent

I

- 20 aspects of the law of New York ( he applicable law) concerning
third party beneficiaries:
An intended third party beneficiary will be found when
it is appropriate to recognize a right to performance
in the third party and the circumstances indicate that
the promisee intends to give the third party the
benefit of the promised performance. Restatement

(Second) of Contracts § 302 (1981).

New York has

adopted the Restatement approach in determining whether
a third party beneficiary exists. Septembertide
Publishing, B.V. v. Stein & Day, Inc., 884 F.2d 675,
679 (2d Cir 1989); Fourth Ocean Putnam Corp. v.
Interstate Wrecking Co., 66 N.Y.2d 38, 44-45, 495
N.Y.S.2d 1, 5, 485 N.E.2d 208, 212 (1985). In
determining third party beneficiary status it is
permissible for the court to look at the surrounding
circumstances as well as the agreement. Septembertide,
884 F.2d at 679; Fourth Ocean, 66 N.Y.2d at 45, 495
N.Y.S.2d at 5, 485 N.E.2d at 1212. Moreover, it is
well-settled that the obligation to perform to the
third party beneficiary need not be expressly stated in
the contract. Vista Co. v. Columbia Pictures Indus.r
Inc., 725 F.Supp. 1286, 1296 (S.D.N.Y. 1989); see also
Strauss v. Belle Realty Co., 98 A.D.2d 424, 426-27, 469
N.Y.S.2d 948, 950 (2d Dep't 1983) (to enforce promise
third party need not be identified in contract but need
only show intent of contracting parties to benefit
third party), aff'd 65 N.Y.2d,399, 492 N.Y.S.2d 555,
482 N.E.2d 34 (1985).

Trans-Orient Marine Corp. v. Star Trading & Marine, Inc.,
925 F.2d 566, 573 (2d Cir. 1991).
Restatement, Contracts 2d, sec. 302 (sec. 302),
I

distinguishes an "intended" beneficiary, who acquires a right by

virtue of a promise, from an "incidental" beneficiary, who does
not.

See Restatement, Contracts 2d, secs. 304, 315.

Sec. 302

provides:
Intended and Incidental Beneficiaries

(1) Unless otherwise agreed between promisor and
promisee, a beneficiary of a promise is an intended
beneficiary if recognition of a right to performance in
I

- 21 the beneficiary is appropriate to effectuate the
intention of the parties and either
(a) the performance of the promise will satisfy
an obligation of the promisee to pay money to the
beneficiary; or
(b) the circumstances indicate that the promisee
intends to give the beneficiary the benefit of the
promised performance;
(2) An incidental beneficiary is a beneficiary who is
not an intended beneficiary.
2.

Cecil's Promise; Marvin's Intent

Cecil was the promisor and Marvin was the promisee.

We must

determine whether the sisters were intended or incidental
beneficiaries of a promise by Cecil to Marvin to pay money to
them.
There is convincing evidence that (1) Marvin believed that
his mother was obligated to his sisters and (2) the supplemental

agreement manifested his intent for her to meet her obligations.4
Marvin testified that his "intention was to have her meet her
obligations * * * within a brief period of time."

Cecil signed

4
With regard to the supplemental agreement, Marvin was asked
on direct examination:
Q
And can you tell me, did you have an idea or some
comprehension of what was meant by the phrase "pursuant
to the understanding made at the time of the death of
William Rosenblatt"?

He answered:
A
I believe it meant that my mother had reached some
understanding with my sisters based on a promise that
she had made to them at that time [at the time of their
renunciations of bequests under William's will), and my
purpose in signing this and having it -- agreeing to it
was to require by mother to meet her obligations to my
sisters.

the supplemental agreement.

We thus have no trouble in

concluding that the first requirement of sec. 302 is met:

The

daughters could show that recognition of a right to performance
in them (to have Cecil discharge her obligation to them) "is
appropriate to effectuate the intpntion of the parties".

Sec. 302(1).

Nevertheless, we be ieve that the evidence

contradicts the second requirement of sec. 302:

Either (1) "the

performance of the promise will satisfy an obligation of the

promisee to pay money to the beneficiary" or (2) "the
circumstances indicate that the ptomisee intends to give the
beneficiary the benefit of the prómised performance".
Sec. 302(1)(a) and (b), respectiv ly.

Respondent has not argued (n r would we agree) that Marvin

had any obligation to his sisters.

Rather, respondent argues:

Petitioner Marvin's stated purpose in signing the
Supplemental Agreement was to require his mother to
meet her obligation to his sisters based on a promise
that she had made to them at the time of the death of
their father. Petitioner Marvin intended that his
sisters would benefit from this contract. The plain
meaning of the Supplemental Agreement is evidence of

petitioner Marvin's intent to make the contract
enforceable by the sisters.
We infer that respondent believes that the conditions of
sec. 302(1)(b) are satisfied.

We disagree.

We do not believe that Marvin intended to give his sisters

the benefit of the promised performance, except incidentally.
Indeed, Marvin testified that, aft r his father's death, "I
wasn't on very close terms with, particularly, two of my three
sisters."

We believe that Marvin intended to give himself the

- 23 benefit of the promised performance, by limiting what money his
mother could take out of WR2 to benefit his sisters, and by
providing a limited period during which she could do that.

cross examination, Marvin testified as follows:
Q
When you started negotiating with your mother to
obtain the controlling interest in William Rosenblatt
A

Yes.

Q
-- was it a concern of yours that your mother had
given support to your sisters in the past?
A

Yes.

-

Q
During these negotiations, were you concerned
that, if she continued to give considerable support,
she would be taking money from the business to do so?
A

Could you repeat the question?

Q
Were you concerned, during these negotiations,
that if she continued to give large amounts of money to
your sister[s] -- were you concerned that she would
take it out of the business if she retained an interest
in the business?

A
I was concerned that any money she took out of the
business was partially mine and she shouldn't do that
because -- without my approval, small or large sums.

*
Q

*

*

*

*

*

*

Was your purpose for entering into * * * [the

supplemental] agreement with your mother to assure that
you would limit her access to business funds to make
any payments to your * * * sisters?
A
No, not to make any. I think it states that, if I
accepted her withdrawals, that it would be okay, but it
would be debited to her account. I think that's
plainly stated.

Q
So when I say -- but -- but in other words, the
purpose of the agreement was to limit and control your
mother's withdrawal from the business to make payments
to your sister -- sisters. In other words --

On

- 24 A

I wanted to --

Q
-- they were controls ppt on your mother, this
agreement.
A
The purpose of this was basically to go public.
It's just to formalize somet ing, where it was said
specifically that she could not. Now, that didn't mean
that she pilfered the cookie jar. It just meant the I
wanted it recorded. I wante it said, written down.

*

*

*

*

*

*

*

Q
Did you enter into this agreement because you felt
it was necessary that the -- that some kind of controls
be put on your mother withdr wing funds?

A
I would term it necessa y. As I said, I wanted to
go public. I believed that, if I went totally public
in the sense that -- a document -- she would live up to
it.
We think that Marvin's intent is well summed up in the final

exchange between respondent's counsel and Marvin.

Marvin

intended to memorialize how and when his mother could take money
out of the business to benefit his sisters.

For a year, she was

free to do so without his assent, subject only to the implicit
limitation that, were she to take too much money out of WR2,
Marvin might refuse to honor his n tes given to her in

consideration for the 46.63-percent interest he was to receive
from her on June 1, 1980.

Thereafter, the supplemental agreement

required Marvin to consent if Ceci

wanted to pay out WR2 funds

to her daughters.

All of this, we believe, was principally for

Marvin's benefit.

Marvin testified that he did not know whether

his sisters were aware of the suppl mental agreement.

Roberta

and Iris testified that they did not have knowledge of the
supplemental agreement at any time before the death of Cecil in

- 25 -

1986.

That the daughters were not aware of the supplemental

agreement is consistent with Marvin not having their benefit as
his principal concern.

Moreover, in large part because Marvin

did not tell them about it, and based on the record as a whole,
we do not believe that he intended to vest in his sisters a right
to enforce the supplemental agreement, and we so find.
We find that Cecil's daughters were incidental beneficiaries
of the agreement between Cecil and Marvin, with that agreement
giving them no enforceable rights against Cecil.

Cf. Burke v.

North Huntingdon Twp. Municipal Authority, 390 Pa. 588, 136 A.2d
310, 315 (1957) (contract stating that third party's claims would
be paid out of the purchase price of property "simply purports to
set up an intra-party plan for the payment of the seller's

obligations").

Therefore, we hold that Cecil made no transfer by

gift to them during the June 30 quarter pursuant to the June 1979
agreement and supplemental agreement.

As previously stated, we

do not have before us those periods during which respondent
claims there were actual transfers of funds to the daughters
pursuant to the obligations that respondent claims arose from the

1979 agreement and supplemental agreement.5
V.

Transferee Liability and Fraud

Since we hold that no taxable gifts were made by Cecil to
petitioner Roberta or to petitioner Marvin during the period in

5
Nor need we consider whether those transfers were not
transfers by gift because supported by the consideration of the
daughters' previous renunciations of bequests under the will of
William Rosenblatt. See, e.g., Rosenthal v. Commissioner, 205
F.2d 505 (2d Cir. 1953), revg. and remanding 17 T.C. 1047 (1951).

- 26 issue, we must conclude that no transferee liability is imposed
on Marvin and Roberta under secti n 6324(b).

Furthermore,

respondent has not carried her bu den of proof with respect to
whether petitioner Estate of Cecil is liable for the fraud
penalty for fraudulent underpayment of gift tax during the period

in issue.
VI.

Sec. 6653(b); Rule 142(b).

Conclusion
Inasmuch as we have found th t petitioners have carried

their burden of proof that no tax ble gifts occurred during the
period in issue, it necessarily f llows that respondent's
transferee liability and fraud per alty determinations cannot be

sustained.

We do not uphold respondent's determinations in any

respect.
To reflect the foregoing and

ue to agreements between the

parties,
Decisions will be entered
under Rule 155.

- 27 Appendix

Entries on the ledger cards found among Cecil Rosenblatt's
papers after her death.
The ledger titled "Roberta" contains the following entries:
DATE

Aug/79
Oct 4/79
1/6/80
3/20/80
4/16/80
1/1/81
6/15/81
8/24
8/26
10/26

ITEM

Dep

Watch
Diam Choker

Gave Storager
for Paintings
10/26
CR Gave Ck to Hackett
Jan/82
Dep
1/15/82
CR check to Hackett
1/8/82
Lisa
3/5
Pearls
illegible illegible
1/10/83
Dep
6/16
Dep

AMOUNT

$360,000
5,000
25,000
15,000
15,000
30,000
30,000
250
6,000
4,720.80
4,268.50
10,000
4,509
500
486
383
30,000
30,000

- 28 The ledger titled "Iris" contains the following entri es:
DATE

Aug/79
9/5/79
2/7/80
3/24/80
5/7/80
5/27/80
5/27/80
6/13/80
6/13/80

ITEM

I

$360,000

Broach & Chain
Gold [illegible]
Ring & Brac.
Diam. Earclips
Cash
Gold Choker

8/4/80
8/28/80
9/15/80

Mary's Saph. Ring
Star Earclips
Watch
Cartier Gold Brac.

9/18/80
9/23/80

Cufflinks
Lapis Brac & Clips
Pr. Pearl Earclips
Diam. Bracelet
Silver Box & B¶ac.

9/23/80
10/2/80

AMOUNT

5,000
25,000
6,500
125
2,350
2,500
5,000
500
1,650
2,500

1,800
1,000
600
550
550
4,500

100
600
12/4
Cufflinks
140
12/5
Chains & Boxes
325
12/9/80 Cash
5,000
12/15/80 Repairing Diam &
285.65
Appraisal
1,135
1/1/81
Dep.
20,000
5/5/81
Ruby Rings
1,200
Cufflinks
100
5/12/81
15.20 Emer. Cut
30,000
6/9/81
Mtg. of 15.20 Em.Cut
2,072
6/11/81 Jossie Studs
400
8/26/81 Susan Earrings[ llegible]
400
9/3/81
Pearls
1,000
9/8/81
Watch A.P.
1,000
9/10/81 Red Watch
900
9/14/81 Rolex Watch
1,500
9/22/81
1 Ruby & 1 Saph. Earrings 1,200
11/20
Choker Diam
10,500
11/23
C.R. loaned I.G.
1,000
1/22/82 C.R. loaned I.G.
7,000
Cufflinks 2 Pr.
300
1/26
Gold Brac. lengthen
150
3/16
Pearl Earclips
65
3/31/82 3 Watches
3,900
4/8
Saph Ring
2,800
5/10
Earclips
1,075
1/83
M.R. Pd.
30,000
6/8/83
30,000
12/3
Cufflinks
200

10/28

Ruby Earrings( ary)

- 29 -

The ledger titled "Hannah" contains the following entries:
DATE

Aug/79
Oct 2/79
Dec 18/79
Jan 16/80
Jan 16/80
Feb 8/80
Feb 14/80
3/11/80
4/9/80
6/20/80
8/15/80
8/28/80
9/29/80
10/20/8
11/13/80
11/24/80
12/5/80
12/15/80
2/27/81
3/27/81
4/3/81
4/8/81
6/19/81
6/19/81

ITEM

Dep
loaned by CR to HG
loaned to HG by CR
by CR
by CR
by CR
by CR
by CR
Airline Ticket
Diam Studs
CK by CR
Studs
Ck by CR
2 Diam Hearts
CK by CR
Airline Tickets
Ck by CR
Ck by CR
Ck to HG
Ck to HG

AMOUNT

$360,000
20,000
5,000
25,000
5,000
2,500
2,500
1,500
15,000
7,000
5,000
1,500
1,000
5,000
868
600
2,500
600
2,053
750
1,500
1,044.90
2,000
25,000
4,000
1,000

8/25/81

Gave to HG

2,500

10/19/81
12/23/81
3/1/82

Ck to HG
Ck to HG
Ticket to Paris 2/16
Ticket to LA
CR [illegible]

5,000
5,000.90
685
84
25,000

3/4

Ticket to LA 2/9

84

5/29
12/7

Ticket to Geneva
Ticket to NY 3/1
Ck to HG
CR sent ck

1/83
5/3
6/6/83

MR pd
Airline
MR pd

260
392
5,000
5,000
3,500
21,500
292
30,000

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3Af04da35c7d6df761. Public record. Not legal advice.