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Appeals Court decision could be boon for certain pre-1977 joint property.

Mrs. Gallenstein and her husband bought farm land in 1955 for $38,500. All of the purchase price came from Mr. Gallenstein's earnings. The property was held jointly with right of survivorship. In 1987, Mr. Gallenstein died and Mrs. Gallenstein inherited the farm and became it's only owner.

In 1988, Mrs. Gallenstein sold part of the farm property for about $3.6 million. She claimed her adjusted cost basis in the property also was $3.6 million and therefore there was no realized capital gain on the sale.

Mrs. Gallenstein arrived at the $3.6 million basis in the property as follows: Mr. Gallenstein's estate, via an amended estate tax return, included 100% of the farm property's value in his gross estate; Mrs. Gallenstein therefore was entitled to a stepped-up, date-of-death-value cost basis in the property under Internal Revenue Code section 1014.

The dispute here was whether 50% or 100% of the property should be included in Mr. Gallenstein's gross estate.

Result: For Mrs. Gallenstein. The Sixth Circuit Court of Appeals decided a complex question of statutory construction, which dealt with the effective date of amendments to IRC section 2040 (inclusion of joint interests for estate tax purposes), in the taxpayer's favor.

As a result of the court's decision, if a spousal joint interest was created before 1977, 100% of that interest is included in the estate of the first spouse to die if that spouse provided the entire consideration for the property. Of course, the court's decision is binding only in the Sixth Circuit.

* Gallenstein (6th Cir., 1992).
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Publication:Journal of Accountancy
Article Type:Brief Article
Date:Dec 1, 1992
Words:259
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